The Bank of Canada raised its benchmark interest rate by 50 basis points on Wednesday, to 4.25 per cent. The move was widely expected by economists, who were anticipating a rate hike of either 25 or 50 points. Canada’s central bank has raised its rate seven times this year in its fight to wrestle inflation into submission. In the process, the bank has taken its rate from functionally zero to its highest point since 2008 — its fastest pace of rate hikes since inflation targeting began in the 1990s. Those rate hikes have had a huge impact on the rates that Canadian consumers and businesses get from their banks on things like savings accounts and mortgages.
As the central bank increases its benchmark interest rate, it becomes more expensive for banks to borrow money. In turn, they will likely raise the interest rates they offer on savings accounts and charge on loans such as mortgages, credit cards, and other forms of consumer credit. This means that Canadians who have loans and credit card balances will see their monthly payments go up, while those who have savings accounts may see their interest earnings increase.
The Bank of Canada’s actions are aimed at keeping inflation in check. Inflation is the rate at which prices for goods and services rise over time. When prices rise too quickly, it can be detrimental to the economy. The central bank tries to keep inflation within a target range of 1 to 3 percent. By raising interest rates, the bank hopes to slow down economic growth and thus curb inflation.
However, higher interest rates can also have negative effects on the economy. For example, they can make it more difficult for businesses to borrow money for expansion and investment, and for consumers to take out loans for major purchases. This can slow down economic growth and potentially lead to job losses.
Overall, the Bank of Canada’s decision to raise interest rates is a balancing act between controlling inflation and supporting economic growth.