On Wednesday, the Bank of Canada increased key interest rates by a quarter of a percentage point, bringing the central bank’s rate to five percent, the highest it has been in 22 years.
According to David Macdonald, a senior economist at the Canadian Centre for Policy Alternatives, the decision was influenced by “mixed messaging” on inflation. While inflation numbers have been consistently decreasing, factors such as lower gas and energy prices have contributed to this trend. However, past rate hikes have led to increased mortgage interest rates and rent, exacerbating inflation.
Macdonald noted that although this rate hike would have a limited impact on homeowners, the crucial factor is how long the higher rates will persist. The concern lies in the number of Canadians who will be compelled to renew their mortgages at these elevated rates.
The labor market is another significant driver of inflation, according to Macdonald. Despite a recent increase in unemployment over the past two months, it is primarily due to more people actively seeking employment. Macdonald explained that in a strong job market, hourly wage rates are rising at a faster pace than the rate of inflation.
The continued strength in the job market is likely a factor leading to the decision for a higher interest rate. However, Macdonald acknowledged that this might not be what workers want to hear. The bank’s focus is on maintaining a certain level of unemployment, which may contradict workers’ desires.