Bank of Canada lifts key interest rate by 0.75 percent to 3.25 percent

Canadians can expect to pay more on their variable-rate mortgages.

That's because the Bank of Canada has just increased its target for the overnight rate by 0.75 percent to 3.25 percent.

That's up from a pandemic-era low of 0.25 percent.

The recent rise is in response to a national year-over-year inflation rate of 7.6 percent in July in Canada. That was down from 8.1 percent the previous month, with the fall largely due to lower gasoline prices.

"Global inflation remains high and measures of core inflation are moving up in most countries," the Bank of Canada said in a statement. "In response, central banks around the world continue to tighten monetary policy."

The central bank anticipates that the interest rate "will need to rise further" in the future. It also pointed out that quantitative tightening is "complementing increases in the policy rate". Quantitative tightening entails removing liquidity or money from the financial markets.

"With higher mortgage rates, the housing market is pulling back as anticipated, following unsustainable growth during the pandemic." The Bank of Canada stated. "The Bank continues to expect the economy to moderate in the second half of this year, as global demand weakens and tighter monetary policy here in Canada begins to bring demand more in line with supply.

It noted that economic activity has moderated in the United States, even though that country continues to have a tight labour market.

"China is facing ongoing challenges from COVID shutdowns," the Bank of Canada added. "Commodity prices have been volatile: oil, wheat and lumber prices have moderated while natural gas prices have risen."

The Bank of Canada pointed out that the economy "continues to operate in excess demand and labour markets remain tight".

The gross domestic product grew by 3.3 percent in the second quarter. Consumption rose by 9.5 percent and business investment increased by 12 percent, according to the central bank.

Earlier this summer, TD forecast that the policy rate would end the year at between 3.5 percent to 3.75 percent.