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policy interest rate needs to rise

By MoneyWay | Oct 26, 2018

This week the Bank of Canada hiked interest rates by 0.25% to 1.75%, and immediately after, Canada’s top banks hiked their prime rates by 0.25% to 3.95%. The increase raises the cost of loans with interest rates linked to the prime rate such as variable-rate mortgages and home equity lines of credit.

The rate was fully expected, but what analysts were looking for was what the BoC had to say about where interest rate are going. While Canada’s inflation is nearing the top end of where the BoC wants it to be, Labour markets are so far showing little signs of wage pressures. Even with the unemployment rate near its lowest point in 40 years. Also, it has analyzed what further increases in interest rate hikes will do to the average Canadian family, and they believe that households are adjusting their budgets largely as expected. Further with the new USMCA agreement in place and the expected effects of tariffs imposed to date, as well as the dampening effects on confidence from threats of future measures. The Bank of Canada feels that the policy interest rate will need to rise to a neutral stance in order to achieve the inflation target.

What that means is that interest rates will go up at least another 0.75% or even higher, which would leave Canada’s prime rate at 4.70%.

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