Bank of Canada Raises Rates, More to Come

The Bank of Canada announced a quarter-point hike in its key interest rate this week, and warns that more increases are still to come.

By early 2008, the Bank projects interest rates will increase another three-quarter points, bringing the overnight rate to 5.25. The current rate is now 4.5.

This is bad news for mortgage-holders, who have already seen lending rates rise in response to the increase this week. While longer-term fixed rates appear stable, those with floating-rate mortgages will start to feel the pinch in the coming months.

The average prime lending rate is currently 6.25 per cent.

The Bank of Canada expects to raise the key rate another three times by early 2008, to counter the unexpectedly high inflation experienced over the last few months, led by a rocketing performance by the loonie, which many expect will be on par with the US dollar by the end of the year.

Canada’s growing economy, bolstered by final consumer spending, is also spurring the Bank to take preventative measures.

However, a strong loonie also means fewer exports, which should take a bite out of inflation. In fact, the Bank expects inflation will be under control by 2009, with interest rates dropping accordingly.

More information on Canada’s economy in the near future is available in the Bank of Canada’s Monetary Policy Report, released July 12.