On Wednesday, June 1, 2022, the Bank of Canada raised its key interest rate from 1.25% to 1.5%. The unemployment rate has increased by 0.5 percentage points for the third consecutive month. To curb inflation, economists expect that the Federal Reserve will raise interest rates a third time this year, resulting in a 50-point increase. This outcome was largely expected by the business sector already. Wednesday was the first time in over 25 years that the Bank of Canada has increased interest rates in consecutive decisions.
The first-rate hikes of 25 basis points in March and 50 basis point in April have already slowed down the Canadian housing market. It is generally because increasing mortgage rates have caused a higher proportion of potential purchasers to postpone their purchasing choices. In April, the inflation rate hit 6.8%, more than double what the Federal Reserve had anticipated. In a handful of cities, including Toronto, both prices and sales decreased over the prior month. The rise brings the bank’s rate to within a quarter-point of its pre-crisis level of 1.75%, and the bank made it clear in its statement that many more rate hikes are anticipated shortly. As a direct result of the bank’s decision, the interest rates tied to variable-rate loans, such as mortgages and other lines of credit, will increase. Even while people and businesses with variable-rate debt will feel the effects of rising interest rates, the Canadian housing market will likely be the sector most impacted by the increase.
Increasing interest rates is one strategy that central banks use to rein in a booming economy. This strategy works because it encourages people to take out loans and make investments. When interest rates are cut, it encourages people to take out loans and make investments, which helps a sluggish economy get moving again. In Canada and several other nations, they lowered their borrowing rates in the first stages of the COVID-19 pandemic. On the other hand, these historically low-interest rates have contributed to the rise in inflation, which has thus forced the central bank to reverse course. Simon Gaudreault, the chief economist for the Canadian Federation of Independent Business (CFIB), says that the most recent rise in lending rates puts a lot of small businesses in a tough spot.
Low-interest rates aided the massive growth of the Canadian housing market during the epidemic; however, the central bank has recently warned that the era of easy money is coming to an end. The central bank has lately cautioned that the period of cheap money is coming to an end, prompting this warning. According to Statistics Canada, the annual inflation rate for the whole nation in April was 6.8%. The greatest contributor to the rise in the Consumer Price Index was the rising cost of both food and housing (CPI). Recent sluggishness in the Canadian housing market is directly attributable to the Bank of Canada-ordered increases in interest rates. In some regions, not only sales but prices have decreased during the last two months. The whole nation closely monitored this development.