The Bank of Canada has announced a 25-basis-point increase in its benchmark interest rate, signaling a shift in its rate-hiking policy after a pause in its last two announcements. With the trendsetting rate now at 4.75%, this decision comes in response to recent data suggesting that the economy is still performing above the Bank’s desired level.

In its statement, the Bank expressed concerns about inflation persistently exceeding the 2% target, stating that the current monetary policy is not sufficiently restrictive to restore the supply-demand balance. Although the Bank expects inflation to ease to around 3% by mid-summer, the unexpected upward tick in April’s inflation rate and a continued GDP growth of 3.1% in the first quarter have raised concerns.

Despite the Bank’s efforts to slow down the economy, Canada’s labor market remains resilient, adding 41,000 jobs in April. Additionally, the national housing market is showing signs of heating up again after a slowdown. These factors, along with the anticipation of economists and swap market traders, have contributed to the decision to increase rates.

This departure from the Bank’s recent stance of maintaining rates at their current levels reflects their determination to address inflationary pressures. Throughout the COVID-19 pandemic, the Bank had kept its benchmark rate at a historically low 0.25%. However, as inflation surged last year, the Bank embarked on an aggressive rate-hiking campaign, resulting in a 425-basis-point increase in less than a year.

This rate hike announcement is likely to have a significant impact on the real estate market in Canada. Variable mortgage rates, which are heavily influenced by the benchmark rate, will likely be affected, potentially leading to an increase in borrowing costs for homebuyers. As interest rates rise, it could impact housing affordability and demand, potentially cooling down the housing market and affecting price growth.

Overall, this decision by the Bank of Canada underscores its commitment to managing inflation and maintaining economic stability. However, the real estate market and borrowers will need to navigate the potential implications of higher interest rates in the coming months.