The Bank of Canada raises its key rate by 100 basis points

The Bank of Canada raises its key rate by 100 basis points

The Bank of Canada raised its key rate by 100 points on Wednesday, bringing it to 2.50%.

Inflation in Canada is higher and more persistent than the Bank predicted in its April Monetary Policy Report, and will likely remain around 8% for the next few months, the body says. Much of this inflation is explained by external factors such as the war in Ukraine, but the internal dynamics of the Canadian economy also influence the rise in prices, underlines the Bank of Canada.

“More than half of the components of the consumer price index are now showing an increase of more than 5%. With this generalization of price pressures, the Bank’s measures of core inflation rose to between 3.9% and 5.4%,” the central bank said in a statement released Wednesday.

The Bank of Canada also justifies the increase in the key rate by worrisome signals regarding long-term inflation. “In addition, survey results indicate that more consumers and businesses expect inflation to be higher for longer, heightening the risk of high inflation becoming entrenched for the economy. setting prices and wages. If this happens, the economic cost to restore price stability will be greater,” said the organization.

A rise of this magnitude all at once is highly unusual. And it comes in a very unusual economic context: inflation is close to 8%, a level not seen for nearly 40 years.

Tiff Macklem, Governor of the Bank of Canada.

Slowdown by the end of the year

A strong economy and a very low unemployment rate add pressure on prices in particular. Rising wages and other costs are forcing many businesses to raise the price charged to consumers, the Bank of Canada points out. With the new monetary policy, the organization expects the situation to improve over the next few months.

“According to the July projection, inflation will start to come down later this year to around 3% at the end of next year and return to the target of 2% at the end of 2024,” says the Bank. .

“The Bank expects the Canadian economy to grow 3½% in 2022, 1¾% ​​in 2023 and 2½% in 2024. Activity will slow as global growth falters and tighter monetary policy will make its effects felt in the economy. These factors, together with the resolution of supply disruptions, will restore the balance between supply and demand and ease inflationary pressures,” reads the press release.

This will not happen without pain. […] But we need to raise the cost of lending in order to reduce spending, to cool inflationary pressures. The current situation is not normal.

Tiff Macklem, Governor of the Bank of Canada

What impact on real estate?

The Bank of Canada‘s key rate has an upward effect on interest rates for loans granted by banks, particularly mortgages. Earlier this morning, an analysis provided by Royal LePage showed that the three previous rate hikes had already had a bearish effect on the real estate market in Toronto and Vancouver. However, the Montreal market continues to heat up with a 2.5% increase in prices in the second quarter.

Contacted by Subway Following the Bank of Canada‘s announcement, Royal LePage is expecting “upheavals” in the real estate market in Montreal and elsewhere. However, the blow should not be too great.

“You have to keep in mind that the rates are not at historic catastrophic levels. They are even reasonable if you look at it on a longer scale. It is the future trend that will dictate the course of things. […] There is a chronic ownership deficit in Canada, so the backdrop remains positive over the long term,” the firm said by email.

As for building owners, the Corporation of Quebec Real Estate Owners (CORPIQ) fears a negative impact on rents and the sanitation of rental housing.

“Obviously, this situation will have an inopportune upward effect on the price of rents. Inflation affects our members and the increase in the interest rate by the banks considerably reduces the leeway of rental owners wishing to invest. We quickly invite governments to study the best fiscal strategies to mitigate the effects and above all to stimulate the construction of housing under several formulas through intensified programs,” said Marc-André Plante, Director, Public Affairs and Government Relations, in a press release.

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