Bank of Canada hikes key overnight interest rate by 50 basis points to 4.25%

It’s the seventh consecutive increase since the Bank began hiking rates in March in a bid to curb runaway inflation.

Thestar.com
Dec. 8, 2022
Chrisine Dobby

The Bank of Canada signalled that the end of a dramatic interest-rate-hike cycle could be near but announced yet another hefty bump Wednesday, bringing its key policy rate to 4.25 per cent and stirring renewed anxiety for mortgage holders and workers alike.

The central bank raised its overnight rate by 50 basis points, the seventh consecutive increase since the Bank began hiking rates in March in a bid to slow the economy and curb runaway inflation.

Since then, core inflation, which strips out the cost of food and energy, has begun to moderate and the housing market has cooled dramatically.

Economists said that new language in the text of the Bank’s announcement suggested Wednesday’s rate hike will be among the last in this cycle of increases and is likely to be followed by a prolonged period of rates holding at this elevated level.

Instead of stating the rate “will need to rise further,” as it has in several recent announcements, the Bank said it “will be considering whether the policy interest rate needs to rise further,” a major shift in wording, according to Marc Desormeaux, principal economist at Desjardins.

“It looks like we’ve started a wait-and-see mode for the Bank of Canada. They’ll take a pause and survey the impact of rate hikes that happened so far on the Canadian economy,” he said.

But the move is still another blow for homeowners, particularly those with variable-rate mortgages, said Leah Zlatkin, a mortgage broker and expert with rate comparison website LowestRates.ca.

“For many Canadians, it’s going to be stressful. Let’s be real. It’s going to be hard,” she told the Star.

For those who pay a fixed monthly amount, the proportion of their variable-rate mortgage payment that goes toward paying down the principal owing has been steadily shrinking all year as the interest has gone up.

If those payments tip toward only covering interest -- called the “trigger rate” -- Zlatkin said mortgage-holders will be forced to make a change such as increasing their monthly payments or switching to a new financial product, likely to come at a higher cost.

The Bank of Canada said in a November report that 50 per cent of variable-rate mortgage holders with fixed monthly payments had already hit the trigger rate point.

Variable-rate borrowers not paying fixed monthly amounts have already been watching their payments rise all year and Zlatkin said Wednesday’s hike means they’ll pay an additional $40 per month for every $100,000 they’ve borrowed.

Organized labour leaders have also criticized the Bank for policies they say leave workers facing the threat of layoffs but do nothing to restrain corporate profits.

The jobs market has remained strong thus far, with unemployment “near historic lows,” but the Bank noted Wednesday that it expects economic “growth will essentially stall through the end of this year and the first half of next year.”

“In the Bank of Canada’s world it’s workers who must pay for inflation through unemployment. We do not accept that workers should be thrown to the wolves in order to meet some arbitrary inflation target,” Unifor national president Lana Payne said in an emailed statement Wednesday. “Stop the rate hikes.”

At Queen’s Park, Ontario Premier Doug Ford was called out for remarks opposing interest rate hikes to fight inflation.

“I believe in keeping interest rates low, keeping taxes low, putting more money into people’s pockets,” Ford said at a news conference in Brampton. “But that’s up to the Bank of Canada.”

Opposition party leaders said the premier does not appear to understand higher interest rates are a standard inflation-fighting tool used by central banks around the world.

“If the Bank of Canada doesn’t do that, what’s going to happen to people’s grocery bills, what’s going to happen to people’s rent?” said interim Liberal Leader John Fraser.

“Anybody can say that stuff. But you know, at a certain point, the bromides and the colloquialisms and the ‘hey folks,’ it doesn’t wash anymore because people are struggling.”

Interim NDP Leader Peter Tabuns said Ford could be helping Ontarians fight inflation by toughening rent controls, going after high profit margins at oil companies and other measures.

“This is a premier who’s actually not willing to take on a lot of the things that are driving inflation ... the things he does control he doesn’t seem to be willing to act on.”