FSRA# 13047 Valko Financial Ltd.

Bank of Canada increases policy interest rate to 5%, prime rate to 7.20%

One of the most closely watched aspects of the Bank of Canada’s announcement is its decision on interest rates. Today, the Bank revealed its decision to raise the benchmark interest rate by 0.25%. This brings the policy rate to 5.00% and the prime rate to 7.20%. This decision has widespread ramifications for borrowing costs, investments, and the overall stability of the Canadian economy.

Implications for Borrowers and Savers:

For borrowers, an increase in the benchmark interest rate means that the cost of borrowing will likely rise. This could affect mortgage rates, credit card interest rates, and loans, making them more expensive for consumers and businesses alike. However, it is essential to note that an interest rate hike is often a sign of a robust economy and can help combat inflationary pressures.

On the other hand, savers may benefit from a rise in interest rates, as they can earn higher returns on their savings accounts and fixed-income investments. This encourages saving and can be advantageous for individuals planning for the long term.

Inflation Outlook:

Another crucial aspect of the Bank of Canada’s announcement is its assessment of the inflation outlook. Inflation is a measure of how prices for goods and services are changing over time. The Bank aims to maintain inflation within a target range to ensure price stability and sustainable economic growth.

If the Bank of Canada perceives inflationary pressures, it may choose to raise interest rates as a means to manage inflation. Conversely, if inflation remains below the desired level, the Bank might consider lowering interest rates to stimulate economic activity.

Year-over-year inflation in Canada currently sits at 3.4%, the lowest level in over two years. Today’s interest rate increase will likely be the final push to get us to the Bank’s target inflation rate of 2%.

In its accompanying statement, the Bank acknowledged that it anticipated inflation to reach 2% by the middle of 2025. This projection represents a “slower return to target” compared to the Bank’s previous forecasts in January and April. The Bank’s revised expectation reflects a more cautious outlook regarding the timeline for achieving its inflation target.

More on the Bank of Canada Announcement:

After nine consecutive rate hikes, the central bank temporarily halted its upward interest rate trajectory in March and April this year. However, recent indications of the economy operating at a faster pace than desired have led to the Bank resuming rate increases for two consecutive months. This decision reflects the Bank’s concerns regarding the economy’s brisk performance, prompting them to address the situation by adjusting interest rates accordingly.

Despite a slight increase in the national unemployment rate in June, the economy managed to add 60,000 jobs during that month. As a result, today’s rate hike did not come as a significant surprise to most observers.

In a recent Reuters poll of economists, 20 out of 24 respondents predicted a 25-basis-point increase as the likely outcome of today’s decision. This consensus among experts further solidified the expectation surrounding the Bank’s move.

The Bank stated its commitment to monitor factors such as excess demand, wage growth, and corporate pricing behavior to ensure they align with the goal of restoring inflation to the target level.

The next interest rate decision by the central bank is scheduled for September 6, providing an opportunity to reassess the economic landscape and determine any further adjustments to the rates.

Join the Valko Financial Newsletter

Get updates on the housing market, economy, and learn valuable homeowner and finance tips!

Ready to get started?

Tracy and her team are here to help. Apply online or contact us today and allow us to help you along your journey in life. We will always provide sound financial advice on the best options for your mortgage.