Bank of Canada raises interest rates as Ukraine-Russia war Pushes prices upward

By Saeed Akhtar – The Milton Reporter Staff

The Bank of Canada today increased its target for the overnight rate to 0.50 per cent, with the Bank Rate at 0.75 per cent and the deposit rate at 0.50 per cent.

This is the first rate hike since October 2018.

“The unprovoked invasion of Ukraine by Russia is a major new source of uncertainty. Prices for oil and other commodities have risen sharply,” the bank said in a statement.

This will add to inflation around the world, and negative impacts on confidence and new supply disruptions could weigh on global growth, according to the central bank. “Financial market volatility has increased. The situation remains fluid and we are following events closely,” it added.

The Bank says global economic data has come in broadly in line with projections in the January Monetary Policy Report (MPR). “Economies are emerging from the impact of the Omicron variant of COVID-19 more quickly than expected, although the virus continues to circulate and the possibility of new variants remains a concern. Demand is robust, particularly in the United States. Global supply bottlenecks remain challenging, although there are indications that some constraints have eased.”

Overall, the Bank is pleased with economic growth.

“Economic growth in the country was very strong in the fourth quarter of last year at 6.7%. This is stronger than the Bank’s projection and confirms its view that economic slack has been absorbed. Both exports and imports have picked up, consistent with solid global demand,” the bank statement read.

“In January, the recovery in Canada’s labour market suffered a setback due to the Omicron variant, with temporary layoffs in service sectors and elevated employee absenteeism. However, the rebound from Omicron now appears to be well in train: household spending is proving resilient and should strengthen further with the lifting of public health restrictions. Housing market activity is more elevated, adding further pressure to house prices. Overall, first-quarter growth is now looking more solid than previously projected.”

Amer Rao, an immigrant-realtor, expects an increase in the prime lending rates of all banks and mortgage lenders by the end of this week. “It will have an immediate impact on variable-rate mortgages and home equity lines of credit (HELOCs),” he told Milton Reporter.

While the biggest concern remains inflation that came in at 5.1% in January and is expected to climb further, the Bank appears confident to get it back down to their target of 2% by using further rate hikes in the coming months and reducing holdings of Government of Canada bonds.

Since hiking interest rates raises the costs for Canada’s major financial institutions to borrow from the central bank, people in the town of Milton fear costs are going to be reflected in higher lending rates and certain loans such as variable-rate mortgages.

John Marsh, an investor from Milton, believes Canada’s housing market is likely to remain hot through much of this year.

The next scheduled date for announcing the Bank’s overnight rate target is April 13, 2022.