Interest rate increase: 1)Bank of Canada raises interest rate .25%; 2)Hike will weigh on variable mortgage holders: broker

1)BANK OF CANADA RAISES INTEREST RATE .25%

Bank of Canada governor Tiff Macklem, when asked what the central bank was trying to accomplish with its first rate hike since 2023, acknowledged the complexity of the global economic situation, particularly around increased energy prices. But he said the policy rate — even with the increase — is ‘low enough that it’s not restraining growth’ but will help get inflation back to target ‘more quickly.’

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The Bank of Canada has raised its benchmark interest rate a quarter-point to 2.5 per cent.

The bank said the increase is needed to reduce the risk of higher energy prices fuelling broader inflation. Canada’s annual inflation rate rose to 3.1 per cent in September, largely driven by surging energy prices due to the war in the Middle East.

The bank’s governor Tiff Macklem had kept the interest rate at 2.25 for seven consecutive meetings. Today’s hike marks the bank’s first rate change in a year and the first rate hike since 2023.

Macklem faces a difficult balancing act: raising interest rates could help slow inflation, but could also weaken growth in an already struggling labour market.

The Bank of Canada’s next rate decision is scheduled for Dec. 9.

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The central bank raised its benchmark interest rate by a quarter-point to 2.5 per cent, marking its first change after seven consecutive holds and its first increase since July 2023.

Governor Tiff Macklem said the hike was “needed to reduce the risk that elevated energy prices could spill over and become generalized inflation.”

As the war in the Middle East has kept oil prices high, the bank expects inflation to reach roughly 3.5 per cent by the end of 2026 and remain at or above three per cent for much of next year.

The bank’s outlook for economic growth has improved slightly, though, with the Canadian economy expected to grow two per cent next year.

He also said the Canadian economy showed signs of resilience through the middle of 2026, growing 3.3 per cent in the second quarter.

Still, Macklem noted that uncertainty surrounding U.S. tariffs and the conflict in the Middle East continues to weigh on the economy.

Today’s hike also means higher borrowing costs for Canadians, including prospective homebuyers.

Deputy governor Carolyn Rogers said the housing market is already struggling, particularly in Ontario and British Columbia, and that the rate increase will add to those pressures.

The bank hasn’t ruled out more hikes, but Macklem stressed that future decisions will be made “one meeting at a time.”

“There could be a need to increase the policy rate further, but given uncertainties, Governing Council agreed to proceed carefully,” the bank said.

2)Hike will weigh on variable mortgage holders: broker

Abby Hughes

Mortgage broker Marcus Tzaferis says today’s rate decision might not do much to weigh on the housing market by keeping new buyers on the sidelines, because so many Canadians are already choosing not to buy.

But it will weigh on mortgage holders.

Those with variable rates will feel it the most. On a $500,000 mortgage, a rate hike of 25 basis points would add about $70 per month on average to a holder’s monthly payments.

While that might not seem like much, Tzaferis says Canadians are already struggling with the high cost of living, pointing to a rise in insolvencies as a sign consumers are having a tough time.

“To a consumer that’s already stretched, these 25 basis point incremental increases are going to have an impact,” Tzaferis said.

For variable rate holders who are thinking about the impact that rising rates could have and want more predictability, Tzaferis says “now is the time” to try and lock in a fixed mortgage.

And for those who will need to renegotiate a mortgage within the next year, Tzaferis says they have the option to lock in a fixed rate further in advance, “almost like an insurance policy for themselves,” which could make sense for some.