Bank of Canada Raises Interest Rate 100pts.
This is the largest rate hike we have seen in Canada since 1998.
The Bank of Canada increased its interest rate today to 2.5%. This puts the bank rate at 2.75% and the deposit rate at 2.25%.
This is the largest single hike to the interest rate since 1998!
This rate is known as the overnight rate, or policy interest rate. This number is used for financial institutions to borrow money from each other. But as the rate changes, the general public is impacted through the prime rate of banks and interest rates on their own borrowed money.
Source: Bank of Canada Website
Because of the continued increase in inflation, the Bank of Canada is doing what it can to lower inflation from the rate it is currently at - which is around 8%. Surveys show that consumers and businesses expect inflation to be higher for longer. Because of this, the Bank of Canada is concerned about the impact on prices and wages - making tackling inflation a top priority.
Global inflation is high due to the ongoing war in Ukraine, as well as supply constraints, and strong demand. In Canada, we are seeing a record low unemployment rate, but plenty of labour shortages and increasing wage pressures. Because of these three factors, coupled with strong demand, businesses are increasing prices to deal with higher labour costs.
Because of all of this, the BOC decided to implement one large increase all at once. Despite this, interest rates will need to rise further, it is assumed, to continue to combat inflation.
How does this help combat inflation?
When money is harder to borrow (a.k.a more expensive), people spend more within their means. They may reduce unnecessary purchases, and save more money. This helps slow the speed of consumption that leads to inflation.
The Bank of Canada introduced 8 fixed dates for interest rate announcements back in 2000. These dates are only altered in emergency situations, like March of 2020 during the beginning of the COVID pandemic. The next interest rate announcement will be on September 7th.
Source: Bank of Canada Website
