The Bank of Canada has made an expected move by increasing its target interest rate by 0.25%, raising it from 4.75% to 5% this morning. It's been quite a while since the Bank Rate stood at 5% - we last saw it in 2001.

It seems there are three main reasons behind this line of thinking and why this may mean that the bank will now take a break and maintain steady rates in the upcoming months.

Firstly, today's increase is mainly driven by the fact that inflation in Canada remains higher than what is considered healthy for both Canadians and the overall economy. However, the good news is that the inflation situation is improving.

Secondly, central banks worldwide are employing a key strategy to combat inflation, which involves making borrowing more expensive. This strategy aims to slow down the economy and alleviate upward pressure on prices. Despite the rising rates, the Canadian economy has proven to be remarkably strong, with record levels of employment, new job creation, and consumer spending. Unfortunately, house prices are also on the rise.

Thirdly, it's important to highlight that the Bank of Canada remains unbiased and unaffected by political influence. They pay no attention to the aggressive talk of politicians seeking votes or uninformed criticism on social media. The bank's approach is based on careful analysis and well-designed programs. 

The rationale for pausing the rate increases is quite compelling. Inflation is on the decline. The US government recently reported that inflation in June dropped significantly to 3.0% compared to the previous month. In Canada, May's inflation also decreased to 3.4%. Interestingly, if we exclude the effect of higher mortgage payments themselves, inflation was only at 2.5% - a curious situation where the solution contributes to the problem.

To further support the case for a pause in interest rate hikes, it's crucial to recognize that implementing such economic policies takes time, especially when dealing with a large and complex national economy. We're not talking about a matter of weeks but rather months to see the impact of the efforts made over the past year to combat inflation. It's essential to allow sufficient time for the economic measures to take effect.

The ultimate goal for policymakers is to achieve a "soft landing." If we can successfully tame inflation without causing a recession or triggering spikes in unemployment or mortgage defaults, we can consider it a victory. As we approach the middle of 2023, it seems that all we need is a bit of patience to see this through.

To talk to us about how these rates can affect your home buying or selling, or any real estate questions you may have contact us at or 905.335.4102 or book a call here.

Posted by Tanya Rocca on
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