Bank of Canada says interest rate increases are "working," explains exactly how

The Bank of Canada increased its key interest rate seven times last year, and this year has already witnessed one more rate hike.

The central bank’s interest rate stands at 4.5% right now, with the latest change coming in January. Throughout its rate hike updates, the Bank of Canada has cited inflation as the core reason for its decisions.

Homeowners and homebuyers have swallowed eight bitter pills since March 2022, paying a chunk of extra change on their mortgages. But have these rate increases actually helped Canadians the way they were supposed to?

Last year in June, Canada’s inflation rate peaked at a shocking 8.1%, breaking a 40-year record. By December, it dipped slightly to 6.3%, but that number is still quite high for people across the nation, many of whom are cutting corners in a bid to stay afloat and put food on the table.

Bank of Canada Governor Tiff Macklem addressed the country on Tuesday to explain how the Bank’s recent interest rate decisions are helping out.

“Our interest rate increases are working,” he said. “Canadians know inflation is high. But some may wonder why we’re fighting it with higher interest rates. Monetary policy — raising or lowering the policy interest rate or holding it steady — controls inflation. That’s our main job. We aim for inflation of 2% a year. It’s what we mean by price stability.”

Macklem admitted that the Bank raised its policy interest rate from 0.25% to 4.5% “quickly and forcefully,” but also shared a list of effects its decisions have had thus far.

You might also like:
• The Bank of Canada might owe you some unclaimed money — here's how to get it
• When will Bank of Canada lower its interest rate? Here's what you can expect
• "Planning to apply for MAID": Canadians share grim ways inflation has impacted them

These are as follows:

• • Borrowing rates have gone up for households and businesses.
  • Spending has declined, especially on housing and big-ticket items like furniture and appliances.
  • The job market is tight, but small signs indicate that higher rates are starting to cool it down.
  • Inflation is falling too — partly thanks to lower global energy prices and improved supply chains, but also thanks to lower demand here in Canada.
  • Fewer businesses think high inflation will last. That matters because expectations about inflation affect decisions on prices and wages.

“Monetary policy doesn’t work as quickly or painlessly as everyone would like, but it works,” he reassured. “And it will be worth it when Canadians can once again count on low, stable and predictable inflation.”

Macklem further admitted that the path ahead is uncertain, and the goal of bringing inflation to 2% is not going to be a quick and easy one. The economy is still overheated.

High interest rates are meant to discourage borrowing of all kinds — mortgages, car or business loans, lines of credit — which lowers the demand for housing, goods, and services.

Less borrowing means people have less money to spend. Lower demand helps the economy catch up with supply.

It must also be noted that the Bank of Canada’s interest rate increases do not solely dictate what happens next. Globally rising oil and energy prices could slow down the process of lowering inflation in Canada.

Increased labour prices and a hot job market could also “continue to push prices up,” and the goal of 2% inflation will become more distant.