Canada's Interest Rate Just Jumped By A Whopping 1% & Here's Why Everyone's Saying 'WTF'

The Bank of Canada has increased the policy interest rate by a whopping 1%, bringing it up to a 14-year high of 2.5%.*

The hike was announced on July 13 by the Bank of Canada and is part of a strategy by the monetary authority to curb the 7.7% inflation rate that the nation is currently experiencing., and "with this broadening of price pressures, the Bank’s core measures of inflation have moved up to between 3.9% and 5.4%"

A hike of this magnitude has a whole lot of Canadians confused or even worried about what it means for their financial future.

And with good reason.

The national interest rate is the rate big banks in Canada get when borrowing money from each other.

When it's higher, borrowing becomes more expensive, making them less likely to borrow and have the extra money.

This then trickles down to the consumer, as banks begin giving things like loans and mortgages higher interest rates due to their smaller coffers.

A higher interest rate means fewer Canadians are likely to take out loans, causing less demand across the economy. This is what is predicted to lower inflation.*

This increase of 1% is particularly surprising as, leading up to the announcement, there were many reports, by publications such as the Financial Post, predicting that it was only going to go up by 0.75%.

One of the groups that this hike is going to affect in particular is those who are taking out a mortgage in 2022, as well as those who have taken out a variable rate mortgage in the past.

When interest rates are high, it makes the cost of buying a home and paying your mortgage all the more expensive.

So, we might see fixed-rate mortgages at a higher rate than in previous years.

Additionally, anyone with a variable-rate mortgage might see their payments going up, as their interest rate will change with the ebbs and flows of the Canadian economy.

And, according to predictions and studies by organizations like The Canadian Centre for Policy Alternatives, further interest rate hikes to curb inflation could result in a recession and a hit to employment in Canada — something that has happened every time the Bank of Canada has tried this approach in the past.

*This article has been updated.

A previous version of this article said the federal interest rate was at a 24-year high. It is actually at a 14-year high. The previous version also mistakenly defined quantitative reasoning and referred to the "policy interest rate" as the "federal interest rate."

It has been updated to reflect these corrections.