Tiff's pause is over

The Bank of Canada’s (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: The decision reinforces the BoC’s pledge to beat inflation, even if it means more pain for Canadians in the short term. 

  • Anyone with debt on variable rates—like a variable rate mortgage or home equity line of credit—is 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 banks’ prime lending rates edge closer to 7%, making the stress test needed to get a mortgage tougher to pass.

Why it’s happening: 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.

  • “Monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target,” 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 April’s inflation rate, according to economist Trevor Tombe.
  • “Excluding 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,” Tombe wrote.

What’s next: Justified or not, the market doesn’t think the BoC is done rate-hiking. It’s now pricing in an 85% chance of rates being higher by September.