Bank of Canada raises key interest rate again to 3.75%

The Bank of Canada has raised the key interest rate by half a percentage point as it tries to further tame decades-high inflation.

Since March, the central bank has raised its key lending rate to 3.75 per cent from .25 per cent, making it more expensive for Canadians to borrow money.

The latest increase did fall short of some economists and the market’s expectations but local experts believe that provides little comfort to Canadians. The announcement has an immediate impact on people with mortgages, loans and potential homeowners.

I’m a little surprised. I was expecting, like a lot of people, 75 basis point hike, the 50 basis point is a deceleration of the interest rate rises. It’s less than I was expecting, particularly given the reports that we just saw on inflation,” economist Jason Childs said.

“Inflation is levelling off, but the core inflation, so excluding food and fuel, is starting to show some entrenchment. So in the face of that, I was expecting another really aggressive move by the Bank of Canada.”

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Experts say the bank expects it will need to raise interest rates even further as it continues its efforts to fight rising inflation. It expects inflation will return to the 2.5-per cent target by the end of 2024.

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The stress of rapidly-rising borrowing costs is already taking a toll on households in Saskatchewan.

Childs says that if you have debt, more of your monthly payments are going to be paying your interest and less will go into paying the principal. “For example if you have a mortgage for about $500,000 then this latest rise is going to cost you about $120 a month,” he said. “If you have a variable rate mortgage now that’s a big hit.”

While interest rates are climbing, Chris Guerrette from Saskatchewan Realtors Association says Saskatchewan still has the most affordable housing rates in comparison to the rest of the country.

“We have not yet experienced a decline in house prices as every other region in the country has, so we’re in a bit of that bright spot there,” Guerrette said.

“That being said, it’s still very much a challenge for those looking to get into the housing market or those who are renewing their mortgage.”

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Guerrette says a sellers market still exists in Saskatchewan due to inventory and labour shortages.

“We are seeing sales dropping. However, we’re also seeing that it’s more indicative of our inventory being very low, not necessarily because of interest rates,” Guerrette said.

“Certainly interest rates have an impact, but we’re also still very concerned about our inventory numbers being low.”

Labour shortages means that builders may not be able to bring the right amount of housing units to the market to keep up with the demand.

“If builders are having a hard time bringing housing to market, if there’s not enough labor out there, then that’s a direct impact to real estate and to housing,” she said. “And on top of that, every time we do bring workers to this province, they need homes. So we have a province right now that’s very focused on addressing this particular challenge.”

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Guerrete  said that interest rate hikes affect renters as well because if it costs more to supply housing. That means the revenue will have to be increased in order to be able to provide those homes.

When asked if now is the right time for people to buy real estate, she said that depends on your financial situation as a professional, your vision for your family and the goals you have for yourself.

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“It needs to be a personal decision and individuals need to surround themselves with the right experts, find the right lawyer, the right accountant, if that’s what you need, the right realtor, and surround yourself with a lot of experts that can help you make the best decision possible.”

As far as what you can do to prepare for an economic downturn in an already challenging situation Childs says saving and being cognizant about where and how you spend your money is the best way forward.

“It’s gonna be really challenging. You’ve got to think really hard about every purchase you make and we haven’t done that in a really long time.”

He added that debt can be dangerous debt or It can be powerful and useful. “Almost nobody buys a house without a mortgage and there’s a good reason for that. You’re buying an asset that’s going to have value over time. That said, using debt to pay for everyday purchases or purchases that don’t last an extended period of time is a bad proposition. That’s a great way to get yourself in trouble.”

Childs said that saving is now way better a proposition than it was two, three, four years ago. You can actually get positive interest rates. “So you’ve got more firepower from risk free savings or low risk saving that’s going to help you out in the long run. But it’s going to be miserable in the short term.”

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