The Bank of Canada has cut its benchmark interest rate for the first time in over four years, lowering the rate by a quarter of a percentage point to 4.75 per cent.

The high cost of borrowing, coupled with inflation, has made finances tight for many Canadian families, especially those with mortgages.

We looked at the numbers with Colin Mang, assistant professor in the department of Economics.

10 

The number of times the Bank of Canada raised its key interest rate between March 2022 and July 2023

Inflation started climbing up in January 2021, during the COVID-19 pandemic due to a variety of factors. First, there was combination of domestic and international supply chain disruptions which reduced the supply of many goods. At the same time, we had the government stimulus programs that put extra money into the pockets of consumers. Many families who continued to work during the pandemic, but had few spending opportunities due to lockdowns, accumulated extra savings which they then tried to spend as lockdowns ended. The result was a situation with higher-than-normal demand, but lower than normal supply, pushing up the price of a broad range of goods and services. We saw inflation peak at eight per cent in June 2022.

The central bank raised its key interest rate in a bid to control that inflation. By raising interest rates, the Bank of Canada makes it harder for consumers to take out new loans; it also encourages Canadians to pay down their existing loans rather than spending the income on new goods and services. The result is that it reduces demand and therefore moderates price increases

The rate went from 0.25 per cent at the start of the pandemic to five per cent, where it’s stayed since July 2023.

2 per cent 

The Bank of Canada’s target inflation rate

The latest inflation data shows that inflation is running at 2.7 per cent. The main contributor to high inflation is housing. If you exclude housing, inflation across all other spending categories averages only 1.4 per cent which is well below the BoC’s target. Canada’s housing crisis is the main driver of inflation today.

2.2 million 

The number of mortgages that will be renewed by the end of 2025 according to CHMC

One of the main reasons why housing continues to be a main driver of inflation is high interest rates. You have all these families who took mortgages three to five years ago when rates were considerably lower. Now, their mortgages are coming up for renewal and people are seeing their payments increase 30 to 40 per cent. It’s not just homeowners feeling the pinch. Nationally, a shortage of rental housing has caused rents to increase at a nine per cent annual rate in April, up from eight per cent in March, which is going in the wrong direction. Because housing represents the single largest component of the Consumer Price Index, our measure of inflation, the increases in mortgage interest and rents is the main contributor to the current 2.7 per cent inflation rate.

3.87 million 

The number of new homes the federal government’s housing plan promises to build by 2031

Higher rates may dampen the price of buying a home because they make it harder for potential buyers to get a large mortgage and bid up the price of homes. But higher rates are also slowing down construction because developers cannot get the loans they need to start building, and some developers are being pushed into bankruptcy. Canada’s population has grown substantially over the past three years while home building has not kept up, leading to our national housing crisis. Without new construction, supply will continue to lag behind demand, keeping both the price of buying and the price of renting higher than it should be for Canadians.

To address the issue, the Federal government has contributed $55 billion to a loan program for developers of rental housing as well as $4 billion for a housing accelerator fund to support municipalities with infrastructure upgrades to allow for new housing. In addition to the financial constraints developers face in getting new projects started, a lack of infrastructure like sewers and roadways can be a barrier to new development which the government is trying to address through the accelerator fund.