Inflation is too high
Interest rates are well and truly on the rise in Canada. Last week, for the second setting in a row, the Bank of Canada doubled its trendsetting Policy Rate. It now stands at 1.0%, up from 0.50% in March, and 0.25% prior to that.
The key reason for the hikes: “Inflation is too high,” said Bank of Canada Governor Tiff Macklem. He also made it clear there will be more rate increases. Inflation is currently sitting at about 6.0%, which is a 30-year high in Canada.
The Bank wants to reduce consumer demand, and for those with mortgages it means higher costs.
In the quarterly economic report that came with the April 13th interest rate announcement the central bank gave itself permission to move faster and harder against inflation. It raised its, so-called, “neutral rate” by a quarter-point, putting in the 2.0% to 3.0% range. The “neutral rate” is the Policy Rate that is seen to be neither stimulating nor impeding the economy.
It may be pertinent to point out that higher rates could contribute to inflation. Housing or, as Statistics Canada calls it, “Shelter” is a key component in the agency’s inflation calculations. While StatsCan does not include the cost of buying a home (it considers real estate as an asset rather than a liability) it does track the cost of actually living in a home. It includes things like repairs, maintenance, property taxes and mortgage interest costs.
The Bank of Canada then uses those calculations when formulating its interest rate policies.