Canada Housing Market

In a surprising move, the Bank of Canada has decided to increase its key interest rate to 4.75 per cent, marking the highest level seen since 2001. This decision was prompted by a series of robust economic indicators that surpassed expectations. The central bank raised its overnight lending rate by 25 basis points (equivalent to a quarter of a percentage point), aiming to address the imbalance between supply and demand and achieve sustainable inflation at the targeted two per cent.

The Bank of Canada’s decision was motivated by better-than-anticipated GDP growth and a tight labor market. Despite predictions that the central bank would maintain the current rate, the strong economic data, including increased inflation and consecutive months of job growth, contributed to the change in strategy.

The central bank embarked on an aggressive campaign to raise interest rates last year, starting from 0.25 per cent and gradually reaching 4.5 per cent in March. The intention was to curtail inflation by making borrowing more expensive, thus reducing consumer and business spending and slowing down the economy. However, the recent economic performance compelled the bank to reconsider its stance.

Canada’s GDP experienced a significant annualized growth rate of 3.1 per cent in the first quarter, surpassing the bank’s projections. Additionally, the country’s inflation rate, after a steady decline from its peak in June, rose to 4.4 per cent in April, significantly exceeding the desired two per cent target. These positive economic indicators influenced the Bank of Canada’s decision to raise the interest rate.

While the increase in interest rates aims to address economic imbalances and stabilize inflation, it remains to be seen how this change will impact consumers and businesses. As the highest interest rate in over two decades, it is expected to have a significant effect on borrowing costs and spending patterns, potentially leading to adjustments in the economy.