In a bid to curb inflation, the Bank of Canada has raised its benchmark interest rate from 0.25 per cent to 3.75 per cent in six consecutive hikes this year. The next rate decision is on Dec. 7.
How interest rates affect your mortgage
What to know about Canada’s monetary policy
What to know about inflation and the cost of living
What’s happening with inflation in Canada?
Canada is experiencing the first inflation surge in a generation. Rising prices for goods and services – including essentials like rent, groceries and gasoline – have eroded the purchasing power of the dollar and made life less affordable for Canadians.
In September, the consumer price index – which measures price changes across a basket of goods and services – was up 6.9 per cent from a year earlier. That’s down from a peak of 8.1 per cent in June, but still more than three times the Bank of Canada’s 2-per-cent inflation target.
The drivers of inflation have evolved over the past two years. Inflation began to rise in the spring of 2021 as surging demand for goods ran into supply constraints caused by the COVID-19 pandemic. Ultra-low interest rates and unprecedented government support for households and businesses helped fuel this demand.
Russia’s invasion of Ukraine compounded the inflation problem, sending global food, energy and other commodity prices sharply higher. In recent months, inflation in Canada has increasingly been driven by rising service prices and wages.
What’s the Bank of Canada doing about inflation?
The Bank of Canada is trying to tackle inflation by increasing interest rates. This makes it more expensive for households and businesses to borrow money, with the goal of lowering demand for goods and services and slowing the pace of price increases.
The bank has raised rates six times since March, bringing its benchmark borrowing rate to 3.75 per cent from 0.25 per cent. That’s one of the fastest monetary policy tightening cycles on record.
Bank of Canada Governor Tiff Macklem said in late October that interest rates need to keep rising. At the same time, he suggested that the bank is getting close to the end of its rate-hike cycle. Financial markets expect further rate hikes in December and January before the bank pauses.
How do the Bank of Canada rate hikes affect average Canadians?
Most Canadians experience interest rates through mortgages, and through various forms of consumer debt, including credit cards, personal loans and auto loans. The prime rate, which commercial banks use to calculate interest rates on variable rate mortgages and home-equity lines of credit, has risen to 5.95 per cent, from 2.45 per cent in 2021. Interest rates for fixed-rate mortgages have also risen.
Higher interest rates will slow down the economy and increase unemployment. The most visible impact so far is in the housing market, where sales volumes and prices have fallen sharply this year. Both consumer and business sentiment has soured in recent months, and a growing number of private-sector economists expect the Canadian economy to enter a recession in 2023. The Bank of Canada expects the Canadian economy to experience almost no growth for the next three quarters.