Bank of Canada hikes interest rates amid inflation fears

We begin with breaking news from the Bank of Canada. As you heard live here just last hour, the central bank has hiked its benchmark lending rate to 2.5%. It's the first time we've seen an increase in three years, and it comes amid soaring energy prices and rising inflation. And Bank of Canada Governor Tiff Macklem says that is precisely why a rate increase is needed. With the outlook for inflation substantially higher and the economy showing resilience, An increase in the policy rate is needed to reduce the risk that elevated energy prices could spill over and become generalized inflation. We are mindful that uncertainty is still elevated. Developments in the Middle East and Canada-U.S. trade relations both remain fluid. There's also uncertainty about the impact of new U.S. tariffs and how much energy costs will seep into consumer prices more broadly. OK, so let's bring back the CBC senior business correspondent, Peter Armstrong, who was listening in along with me. OK, so, Peter, this quarter percentage point hike was not unexpected. We've been reporting on it. So can you expand the central bank's reason behind making this decision? Yeah, the whole idea here, Arti, is that they were trying to contain inflation essentially where it is right now. This is mostly an energy story. It's diesel and gas and heating fuel. They want to make sure that that doesn't spread it and everything else. And the governor made that clear. You can look at this chart here and you can see this is the first time we've seen. So what the dotted line here is the interest rate. The blue line is inflation. And as inflation has started to tick back up again, you can see it's starting to become a problem. The bank likes to have it between two and three percent. So it's outside of that. But as I say, it's still largely contained to energy. Bumping out of that is where they get concerned. And if it seeps into all those other products, it becomes an even harder problem to try to rein back in. If it's just energy and diesel and oil, once you sort out the global oil prices, diesel prices follow, inflation follows suit. If it's seeped out into everything else, it's a much harder solution to get to. Now, this is the first time in almost basically a year since they've moved at all. And the first time since July of 2023, is it, that the Bank of Canada has increased. And back then they were going up. It was going from 4.5 to 5 percent. This only takes us to two and a half percent. And the bank says there's still, it's not restrictive enough that it's really going to slow growth materially, but it can hopefully act to contain that inflation and keep it, as you say, from spilling over. You know, when we were talking earlier today, Peter, too, we noticed that there had been a pattern of sort of incremental cuts before steady and then incremental hikes as well. And the Bank of Canada governor was asked specifically, Are there more hikes to come now? Yeah, so the governor of the Bank of Canada, Tiff Macklem, is never going to tell us, yes, there's more to come, or no, we think we've got it here. He's always going to say this is data dependent. But in the business unit yesterday and the day before, we were all debating, when was the last time the Bank of Canada did one move, up or down, and then just sort of held its place and said, OK, we got it, we're good. None of us could come up with an example. So usually these move in sequences. CIBC, for example, is saying they'll hold at the next meeting, but then maybe raise after that. So we're going to see a lot of projection. The key line from the Bank of Canada is this one. It says, Governing Council agreed we would take future decisions one meeting at a time. There could be a need to raise policy rate further, but given the uncertainties, we will proceed carefully. I think people understand that that's kind of how the Bank of Canada operates. But there's a lot of information telegraphed in what they're not saying here. And they're saying, look, we don't usually move one at a time. If it's warranted, we are going to take steps to try to keep that inflation contained. Okay. Peter, thank you for this. That's the CBC senior business correspondent, Peter Armstrong. Okay, so with the Bank of Canada making its latest move on the benchmark interest rates, many homeowners and prospective buyers will be asking, what does this mean for my wallet? So for more on that, let's bring in mortgage broker, Elon Weintraub. He is also co-founder of MortgageOutlet.ca. Okay, thank you for joining us here in studio to talk about this decision that was just announced by the Bank of Canada. Do you think that they made the right choice here? They were saying they were in between hold or hike. Yeah, I absolutely think they made the right choice. Inflation is kind of like a forest fire, and you really need to contain it. Otherwise, it can get out of hand. There's a lot of uncertainty. There's a lot of higher costs for gasoline and for shipping and transportation. And if that leaks into the broader economy, bad things will happen. So they made a clear decision, and I do think there's going to be more hikes coming along the way. OK, so the average person watching this from home is thinking, OK, how is this going to impact me right now? Yeah. So if you have a fixed rate mortgage, good news is you don't need to worry about it. Your rate is set. It's fixed. That's the advantage for variable rate mortgage holders. There's really two scenarios. So rates have gone up and your bank or lender will increase rates. For some lenders, your monthly payment will immediately go up. If you're paying $2,000 a month, it might go up to $2,100 or $2,200. But for other lenders, they're going to accrue the interest behind the scenes and keep your payment steady at $2,000 a month. So it really depends on your lender. Some lenders will increase your payment. Other lenders will keep it constant. If we stay in the housing market for a moment, those people who have been standing on the sidelines waiting for a correction to happen so that prices are more affordable for them, what does this mean for those individuals now? Yeah, so on a very tactical and mathematical level, their monthly payments will be higher with a new variable rate. But potentially the good news, you know, Warren Buffett said, be greedy when others are fearful and be fearful when others are greedy. If a lot of buyers are very scared, a little cautious, it might be a great opportunity for a buyer to come in when the market is cooler and maybe get a really good deal. And, you know, they have time on their side because people are hesitant. You know, we heard a lot of the word uncertainty, and that's certainly something that we know markets do not like. And part of that to do with the factors that were listed by the Bank of Canada governor, the conflict in the Middle East, the ongoing trade tensions with the United States and how that might all unfold, which, of course, has been incredibly unpredictable. But there has been some growth. There's an expectation of a bit of a slowdown, though, however, as it might also pick up. But they really want to avoid higher energy prices and that spillover, that trickle-down effect. How likely is it that this move could avoid that? I think this is just a little tap on the brakes, but I think they're going to keep monitoring very closely the tariffs and the geopolitical situation globally. It's very fickle and volatile. And listen, we all hope for good things to happen and energy prices calm down and then they don't need to keep increasing rates. But if they keep seeing risk and uncertainty and higher prices, they will not hesitate. Their clear mandate is to control inflation. It's not to control unemployment. It's not to, you know, give us all better lives. Their single mandate is inflation, and this is their one tool to do that. You know, you partially addressed this a little bit. I want to share something that Ontario's premier put online this morning, saying raising interest rates right now is a massive mistake. Higher rates won't get oil moving through the Strait of Hormuz or lower tariffs on Canadian businesses. They will only make life more expensive for Canadian families and workers, punishing them for something they can't control. What do you make of that comment from Ontario's premier and how it does relate to how people might be feeling right now? Yeah, so I think that it hurts people for many people. If you have a home equity line of credit or a variable rate mortgage, it does hurt them. But again, the Bank of Canada is looking holistically at the entire country and they really need to contain inflation. because if inflation gets out of hand, the whole economy can't handle it. They don't understand $100 today is $90, tomorrow is $80 the next week. So they're really trying to focus on making sure the dollar is protected and clear and then there will be people that pay a price or victims. You know, you've touched on this, but very finally, I just want to ask for you. People at home, what sort of advice would you offer them right now, given what we've seen in the past, as we were discussing with Peter, Those incremental cuts, a study, and then could there be incremental hikes? We sort of heard a little bit of alluding to that. I think it's a good time to look at your finances, look at your income, look at your expenses, see what's optional. Is there anything that you can cut out? And most banks and lenders will let you overpay your mortgage by $100, by $200. If you have that ability or if you can relook at your budget, $100 in the grant scheme doesn't look like a lot or $200. but over weeks and months and years it definitely can add up and save you years and years off your mortgage payments okay great advice thank you for joining us today we appreciate it thank you that is Elon Weintraub he is a mortgage broker and the co-founder of mortgageoutlet.ca thanks again thank you