The Bank Of Canada Raised Its Key Interest Rate & It Could Help Cool Red-Hot House Prices

The Bank of Canada announced on Wednesday that its key interest rate has increased to 1.5% — bad news for those who have borrowed money, such as mortgages, but a step toward ultimately making inflation-stricken Canada more affordable.

The central bank also warned that it's "prepared to act more forcefully" to meet its target of lowering Canada's inflation rate to 2%, suggesting that further hikes could be on the horizon as early as the next interest rate announcement on July 13. Canada's inflation rate hit 6.8% in April, the country's highest clip since January 1991 — back when Home Alone reigned supreme at the box office and Drake was still just Aubrey.

How did we get here? With the economy sputtering to a halt after the outbreak of COVID-19 in March 2020, the Bank of Canada set the key interest rate as low as 0.25% to encourage Canadians to keep spending. That growth-friendly rate was maintained through early 2022, contributing to what the central bank is calling an "economy in excess demand" — meaning that there are more willing buyers than sellers. For example, housing markets across the country have been beleaguered by supply issues, causing home prices to rise and the affordability of cities like Toronto to plummet.

More recently, thanks to international factors like Russia's invasion of Ukraine, COVID-19 lockdowns in China and global supply-chain issues, the cost of essentials like food and energy have further skyrocketed, both in Canada and globally, according to the Bank of Canada.

Ironically, hiking the key interest rate should eventually make home ownership more attainable for young Canadians in the long run. When the Bank of Canada bumped the rate from 0.25% to 0.5% in March, then to 1% in April, the country's overheated housing markets experienced a cooling effect.

On the other hand, the cost of borrowing money has indeed increased, and with the threat of future interest rate hikes to come, young would-be home buyers must consider whether they're in a position to handle an even pricier loan before signing off on that Liberty Village condo.