The Bank of Canada is expected to announce its latest interest rate decision on Wednesday morning as markets widely expect the central bank to hike its benchmark rate by a quarter of a percentage point.
This would take its key interest rate to 4.5%, the highest since 2007.
The Bank of Canada has raised interest rates seven times in a row since March in the face of decades-high inflation.
Economists expect Wednesday’s rate hike to be the last of the cycle.
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Given that there is a lag between the increases and their effects on spending, the Bank of Canada should monitor the evolution of the economy in the coming months.
The central bank will also release its quarterly monetary policy report today, which will provide updated projections for economic growth and inflation.
Economists predict that the central bank, which has made a rapid succession of significant hikes since it began to rise from near zero in March, is nearing the end of the increases.
The rate hikes are aimed at reducing stubbornly high inflation, which peaked over the summer, but the shock to the economy could lead to a recession.
Here’s a look at what the rate means, how analysts interpret it, and what it could mean for consumers.
What is the key rate and what is it used for?
The policy rate, also known as the target overnight rate, is the amount of interest the Bank of Canada charges commercial banks when they lend money to each other overnight to settle balances. dailies.
Knowing how much it costs to lend money or deposit it with the central bank helps set the interest rates charged on things like loans and mortgages.
Lowering the rate generally makes borrowing more affordable, while raising it makes it more expensive.
Why does the bank use the rate to target inflation?
Inflation is a measure of the rise or fall in the prices of goods and services. High inflation is a sign of an overheated economy.
Canada’s annual inflation rate peaked at 8.1% in June, the highest level in four decades.
It has since eased, reaching 6.8% in November and 6.3% in December. And shoppers saw even higher price increases for everyday expenses like groceries. Grocery prices rose at the fastest rate in decades and were 11% higher in December than a year ago.
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Economists and the central bank want to see inflation ease further, which is why interest rates have risen so rapidly in hopes of cooling consumer habits.
“Inflation is still too high and near-term inflation expectations remain elevated,” the bank said in its latest announcement. “The more consumers and businesses expect inflation to be above target, the greater the risk that high inflation will take hold.”
What does this mean for my mortgage?
Mortgage rates tend to rise or fall along with interest rates.
When Canadians buy a home, they can choose between two types of mortgages: fixed rate or variable rate. Fixed rate mortgages allow borrowers to lock in the interest rate they will pay for a set period of time, while variable rate mortgages can fluctuate.
If the bank adopts a 25 basis point hike on Wednesday, prime rates should rise to 6.7% and variable rates will be set at around 5.75% and higher, said Leah Zlatkin, mortgage broker at LowestRates.ca.
Assuming their mortgage has a 25-year amortization and they had a 15% down payment, she said a homeowner with a variable mortgage rate of 5.45% on a house priced at $700,000 will have a monthly mortgage payment of approximately $3,716.
The same 5.7% mortgage will see monthly mortgage payments rise to around $3,805, a jump of $89 per month, she added.
“This will put greater pressure on an already struggling housing market,” Zlatkin said in a press release.
“For Ontario homeowners seeing increased property taxes on top of rate hikes, this is likely to be the worst pressure homeowners have ever felt.
Does this mean that interest rates will soon stop rising?
Royce Mendes, Desjardins managing director and head of macroeconomic strategy, expects a hike on Wednesday and thinks it will be the last for some time, but warns Canadians shouldn’t be overconfident that interest rates will not increase further.
“The Bank of Canada needs to make sure it has done enough to get inflation back on track to the 2% target. And it’s not clear yet,” he said.
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TD Chief Economics Officer James Orlando said while it intended to stop raising rates, the Bank of Canada couldn’t seem to back down too much in its Wednesday announcement.
Orlando expects the Bank of Canada to say it does not foresee the need for further rate hikes, but will continue to monitor changing economic conditions. That way, the door is open for further rate hikes if needed, he said.
“Obviously, if things get out of control … then they may have to raise rates again,” Orlando said.
— With files from Nojoud Al Mallees in Ottawa
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