The Bank of Canada raised its benchmark interest rate to 1.5 per cent on Wednesday, marking a second straight increase of half a percentage point.
The 50-point move was widely expected by economists who predicted the central bank would raise rates for the third time this year in an effort to tamp down on high inflation levels.
Wednesday’s increase marks the first time the Bank of Canada has hiked rates 50 basis points in back-to-back decisions in nearly 25 years.
“With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further,” the Bank of Canada said in a statement.
“The pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation, and the Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the two per cent inflation target.”
Initial rate hikes of 25 basis points in March followed by 50 basis points in April have already had a cooling effect on Canada’s housing market as rising mortgage rates keep more buyers on the sidelines.
Some cities including Toronto saw a slowdown in sales and a drop in prices last month.
Statistics Canada said the annual inflation rate was 6.8 per cent nationally in April, with the rising price of food and shelter pushing the Consumer Price Index (CPI) higher.
Small businesses to feel the pinch, CFIB says
The latest interest rate hike puts many small businesses in a tough position, said Simon Gaudreault, chief economist for the Canadian Federation of Independent Business (CFIB).
“Only 35 per cent of businesses have no COVID debt, and the average debt for small businesses in Canada is $160,000. So obviously, if you go into a situation where the (economic) recovery is far from being completed for a lot of small businesses, other data is showing that only 40 per cent are back to normal pre-pandemic sales … a lot of small businesses are in a tough situation,” he told Global News.
As her photography business picked up last year, Stephanie Haughton moved into a bigger home with her family and took on a mortgage at a variable rate as her agent suggested.
At the time, the rates were low, but the latest hikes mean the Bowmanville, Ont., small business owner may have to increase prices for her clients soon.
“I don’t have a huge mortgage,” she told Global News.
“I guess I’m fortunate but for me, it would still mean $100 a month. … If I don’t have a lot of clients that month, that’s an extra $100 I need to find for me and my kids.
“If I knew that this would have been a potential situation that I was getting myself into, I would have gone with a fixed rate last year. I was putting my trust in the mortgage agent, and obviously, he didn’t know what was going to happen, but I definitely regret choosing the variable rate. It’s stressful.”
In Windsor, small business owner Christopher Courey told Global News rising inflation has put him in a tough balancing act.
“We’ve seen some products go up by two or 300 per cent from last year in terms of cost. They’re not high-dollar items, so they’re not that noticeable, but the percentage is quite large in both businesses that we have seen some pretty consistent price increases,” said Courey, who has two retail stores with his wife.
“In some cases, we’ve raised our retail prices and in other cases we have been kind of depending on what our feel is for the consumer and whether or not they can continue to purchase those items, or they’d then be price sensitive on them.
“With the supply chain, in terms of labour shortages, we have noticed that through our suppliers not being able to ship orders as frequently or as consistently because they themselves are facing labour shortages even though we may not have labour shortages in our small business, we’re feeling the ripple effects by them having labour shortages.”
How could this impact the housing market?
The Bank of Canada’s previous interest rate hikes have had a cooling effect on Canada’s red-hot housing market. Some cities have seen a decline in sales and in prices over the past two months.
Consumers are taking a breaking from the buying frenzy experienced during the COVID-19 pandemic and are evaluating how the higher cost of borrowing will impact their budgets, said Sung Lee of RATESDOTCA in a statement.
“What is easy to forget is that we’ve had two years of artificially low rates. If you look at the past 25 years, the average five-year fixed mortgage rate is 5.65 per cent and variable at 4.38 per cent, which is still higher than where we are today,” Lee said.
“Despite further increases, we are getting closer towards normalized rates. The group of homeowners most at-risk are those who overextended to purchase a home over the past two years without a sound game plan as rates rise.”
Every interest rate hike has Canadian homeowners and hopeful buyers readjusting their affordability expectations, said Leah Zlatkin of LowestRates.ca in a statement.
“While this change may be difficult to manage alongside other increased costs of living right now, it’s important to remember that before the pandemic the overnight rate was at 1.75 per cent and we’re not yet back at that level,” Zlatkin added.
— with files from Anne Gaviola
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