What the new 2.5% interest rate means for Canadians

After holding interest rates steady for almost a year, the Bank of Canada is making a move, hiking the policy rate by 25 basis points to 2.5%. The main argument for an increase was that energy prices are higher, they are expected to remain higher, and cost pressures are building. Which means pressure is building on the bank to stay ahead of inflation. It says high fuel prices are raising the costs of production and transportation. Businesses could pass that on, pushing up prices more broadly for consumers. So we haven't seen broad-based, you know, kind of a broader-based increase in prices, but I think the bank is starting to be concerned about what's coming down the road. The hike will quickly make borrowing more expensive for Canadians with an auto loan, line of credit, or mortgage tied to a variable rate. For example, a homeowner with a $500,000 variable rate mortgage could now be paying about $70 more every month. It's not going to feel good immediately, but that's how you get inflation back down. While variable rate mortgages have lower interest and more flexibility, for some Canadians, they can be nerve-wracking. It was very unpredictable and stressful. I'm like, how much are these going to increase and to what point? Barbara Best recently decided to lock in to a fixed rate. So that gave me total predictability and certainty, which peace of mind was really important to me. Mortgage experts say starting to research early and shopping around is key. There's a lot of wiggle room for the banks, and the banks will do quite a bit to keep their customers. The Bank of Canada says more interest rate hikes are possible, though with so much uncertainty around the conflict in the Middle East and the trade war, it will take each rate decision one meeting at a time. Nisha Patel, CBC News, Toronto. Let's bring in senior business correspondent Peter Armstrong. Peter, this quarter point change to borrowing costs obviously is not going to solve Iran's threats to shipping in the Strait of Hormuz. So what is the Bank of Canada hoping to achieve? Yeah, the idea here is to try to keep inflation contained within the energy sector. Because right now, inflation is still largely the story of the cost of gas, diesel, home heating, fuel. Once that spills over into other categories, it gets a lot harder to rein back in. And we're looking at, what, eight months now of war and rising energy costs. Businesses can eat that for a while, but the central bank's worried that their patience won't last. As we've been saying for some time, the longer energy prices remain high, the more likely it is that these costs will spill over to consumer prices more broadly. So if you produce stuff or you ship stuff, your cost of business is higher now because gas and diesel prices are higher. So Macklem's hoping that this increase and that the message that the bank is willing to take action if it needs to, that that will prevent that spillover for a while at least. Of course, raising rates comes with risks. It does. And the Bank of Canada has had this dilemma for a while now. Two very different problems in the economy. On the one hand, weak growth, the other, rising inflation. The problem for the bank is it can only do one thing at a time. It can raise interest rates or cut interest rates. And normally to fight weak growth, you'd cut rates and that would make inflation worse. To fight inflation, you'd raise those rates, but that's going to make that slow growth even worse. And so we have two problems with two totally different solutions that actually make the other one worse. OK. And any idea of what's going to happen next when it comes to rates? So the bank says it's going to take this one at a time, but that there could be a need to raise the policy rate further. We've been hearing from economists through the day who think we could see as many as another three interest rate hikes. by the end of next year senior business correspondent peter armstrong