The Bank of Canada increased its key interest rate by one percentage point Wednesday in the largest hike the country has seen in 24 years.
The move indicates the central bank will take a more aggressive approach to tackling inflation, which sits at a 39-year high of 7.7 per cent and has made groceries, vacations and other purchases more pricey.
The hike to 2.5 per cent will also impact mortgages, loans and spending habits.
“We are increasing our policy interest rate quickly to prevent high inflation from becoming entrenched. If it does, it will be more painful for the economy — and for Canadians — to get inflation back down,” he said, noting that the bank doesn’t expect the official inflation rate to come down to three per cent until next year, and won’t get back to its two per cent target until 2024.
Prospective home buyers must have their finances stress tested to ensure that they can withstand higher lending rates, and Wednesday’s rate hike will raise that testing bar to about seven per cent for fixed rate loans, and six per cent for variable loans.
If borrowers don’t pass the stress test, lenders are obligated to lower the amount they will lend to them, until they meet the bar.
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