The Bank of Canada, on December 7, 2022, raised its overnight rate target from 3.75% to 4.25% in line with its policy of quantitative tightening. This policy aims to decrease the amount of money flowing into the economy by reducing the number of reserves held by the Bank. Inflation remains at 6.9%, and the Governing Council may consider further increases in the policy interest rate to lower the supply and demand to a controlled level and return inflation to target levels.
When the Bank of Canada raises its benchmark interest rate, it becomes more expensive to borrow money. It impacts both individual borrowers as well as businesses. This is because the interest rate serves as a reference point for determining the cost of borrowing. For example, with the high expense of borrowing money, the interest rate on mortgages also tends to increase, which means that borrowers will have to pay more towards the interest over the course of the loan and lesser towards the principal amount. The Bank of Canada continues to monitor the economy and may make further adjustments to the interest rate in the future. These decisions are made by the Bank of Canada’s Governing Council, which considers various economic factors when determining the appropriate interest rate. The Bank made this decision because it believes that the economy is strong and is expected to continue growing.
The decision to raise the interest rate is often seen as a sign that the economy is strong and is expected to continue growing. Higher interest rates can also make it more attractive for people to save money in a bank account or other interest-bearing investment, which can encourage savings and support economic growth.
However, higher interest rates can also negatively affect the real estate market. When it becomes more expensive to borrow money, it can make it more difficult for people to qualify for a mortgage, leading to lower housing demand. Higher interest rates can also make it less attractive for homeowners to refinance their mortgages, leading to a decrease in the housing supply. Additionally, higher interest rates can affect the housing market by making it more difficult for homeowners to refinance their mortgages. When interest rates rise, it becomes less favourable for homeowners to refinance their current mortgage as they might not be able to afford the lower interest anymore. As a result, they might even be forced to sell their homes. And also may choose to stay in their current home rather than sell and buy a new property or a second home. This can also lead to a decrease in housing demand and home prices.
In conclusion, the Bank of Canada’s interest rate increase on December 7, 2022, is likely to positively and negatively affect the real estate market. While it may make it more difficult for some individuals to buy a home, it is also a sign of a strong and growing economy. It is essential for those in the real estate market to carefully consider the potential implications of higher interest rates and make informed decisions based on their individual circumstances.
