Canadian Housing: What To Expect After Latest Bank of Canada Interest Rates Hike

 | Jun 13, 2023 08:08

May 16th 2023, came with a lot of uncalled surprises for all of us as it was the day when the inflation rate rose to 4.4%. From that point onwards all eyes have been on the Bank of Canada, which in all fairness was not expecting for this to happen, trying to guess what their course of action would be to tackle the running 30 - year high inflation.

Although many experts at the time believed that BOC still had some wiggle room, as the days passed it became abundantly clear that it wasn't the case. Finally, on June 7th 2023 the Bank of Canada made its decision, which is to increase the policy rate by 25 basis points leaving home buyers of both the past and the future uncertain of their place in the upcoming Canadian real estate industry.

If you are one of them then this report from The Canadian Home is for you. Not only will we look into what led to this but also where it is leading to so that you are in a better position to gauge where you stand and where to go from here.

h2 WHY DO IT?/h2

There are many factors that forced the Bank of Canada into raising the policy rates after months of hold however the sum total of which can be categorized into three.

h2 1) TO TACKLE THE INFLATION/h2

Bank of Canada governor Tiff Macklem made it clear in a speech following a decision to hold the interest rate previously by saying "This pause is conditional, it depends on whether the economy develops as we think it will and whether inflation continues to fall."

Since that did not happen and the inflation contrary to what they thought increased instead the rate hike was inevitable. Bank of Canada has been raising interest rates to tackle inflation, which refers to the increase in prices over time. One way to measure inflation is through the Consumer Price Index (CPI). In April, the CPI went up by 4.4% compared to the previous year from a 4.3% in March.

h2 2) GROWTH IN GDP/h2

Now, let's talk about Canada's economy. In the first quarter, which covers the first three months of the year, the country's economy grew at a rate of 3.1% when compared to the previous year. This growth rate is higher than what the central bank had predicted. BoC had expected the economy to slow down during this period. However, the latest data indicates that the economy performed better than anticipated resulting in a higher inflation rate.

h2 3) THE JOB MARKET/h2

The Canadian job market is currently going strong, as indicated by the record-low unemployment rate of 5%. In the past month alone, employment rate has increased by 2%. This basically results in a direct impact on people's spending capacity. As people's spending capacity improves due to favourable employment conditions, businesses respond by increasing prices to meet the rising demand which then contributes to inflationary pressures in the economy.

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In response to this robust labour market and with the aim of reaching their 2% inflation target by the end of 2024, the Bank of Canada has decided to raise interest rates. This decision takes into consideration the ongoing economic growth and the strength of the labour market.