As a result, big banks have all moved to match rate hike

The Bank of Canada has proved speculators right, again increasing its benchmark interest rate.

This time the rate has gone up to 4.75 per cent. This latest move to increase its target for the overnight rate from 4.5 per cent to 4.75 per cent takes the bank’s benchmark to its highest level since 2001. 

It’s the first time Canada’s central bank has raised its trend-setting interest rate since January when the bank signalled it would conditionally pause its aggressive campaign of rate hikes to wait and see if it had done enough to bring down inflation.

Since then, the data has shown the Canadian economy to be unexpectedly resilient, as it has grown by more than expected. After declining for nine months in a row, the inflation rate unexpectedly ticked higher last month.

Mortgage rates starting to go up

The rate hikes already announced have added more than CAD$1,000 to the monthly payment on a CAD$500,000 mortgage and that’s before yesterday’s increase. Within hours of the central bank’s decision, Canada’s big banks all moved to match the bank’s hike, raising their prime lending rates to 6.95 per cent. 

While investors and economists thought there was a slight chance the bank would raise the rate now with speculators banking on an increase. However, this latest increase nonetheless came as a surprise to the consensus view that the bank would probably do so later this year.

Now, observers are increasing their bets that even more rate hikes are coming. Trading in investments known as swaps has fully priced in at least one more hike by the end of the year and is even open to the possibility of one more past that, to 5.25 per cent or beyond.

Questions mounting about rate hike

The central bank’s move is going to make life even more expensive for variable-rate mortgage holders, many of whom have seen their payments skyrocket this year. Armine Yalnizyan, an economist and Atkinson Fellow at the Future of Workers is questioning the bank’s move, saying it will hurt vulnerable Canadians while doing nothing to fix underlying inflation and maybe even make it worse.

In an interview with CBC News yesterday, Yalnizyan pointed out that the single biggest driver of the increase in the inflation rate last month was mortgage interest costs, which increased by 28 per cent in the past year. Higher mortgage costs aren’t just a problem for owners; they filter down into the rental market, too.

Tanzim Nasir owns some investment properties in the Edmonton area where he lives, and he says the recent slew of rate hikes has left some of them cash-flow negative — he pays more every month to cover the costs than he gets in rent.

Brian Yu, an economist with Central 1 Credit Union, told CBC News in an interview yesterday that he was surprised the bank did what it did.

“I really don’t think that it’s necessary for further hikes at this point,” he said, noting that it typically takes at least 18 months for the full impact of rate hikes to be felt, which raises questions as to why the bank thought another one was necessary after only standing pat for a short time.