The Bank of Canadaâs (BoC) conditional pause on interest rate hikes ended with its decision to raise its policy rate to 4.75% yesterday, the highest level in 22 years
Why it matters:Â The decision reinforces the BoCâs pledge to beat inflation, even if it means more pain for Canadians in the short term.Â
- Anyone with debt on variable ratesâlike a variable rate mortgage or home equity line of creditâis about to get walloped with higher monthly payments or longer repayment periods.
 - The recent housing market turnaround may also be a casualty of the rate bump as big banksâ prime lending rates edge closer to 7%, making the stress test needed to get a mortgage tougher to pass.
Why itâs happening:Â An inflation uptick, a jump in housing prices, and hotter-than-expected growth scared Tiff Macklem and the gang into bringing the interest rate hammer down on the economy again.
- âMonetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target,â the Bank wrote.
Yes, but: Rising rates are also pushing inflation up by making mortgages more costly.
- Mortgage interest costs contributed 0.8 percentage points to Aprilâs inflation rate, according to economist Trevor Tombe.
 - âExcluding mortgage rates, the 3-month average inflation is much better. In April, it averaged 3 percent. And over the past many months, has been well within target,â Tombe wrote.
Whatâs next:Â Justified or not, the market doesnât think the BoC is done rate-hiking. Itâs now pricing in an 85% chance of rates being higher by September.