Canadians are feeling the squeeze from a major cost-of-living crisis: grocery bills are high, mortgage rates have jumped, and everyday expenses bite deeper into household budgets. Since March 2022 the Bank of Canada (BoC) has raised its policy interest rate by 475 basis points (4.75%) to combat inflation. But are these hikes working, and what should households expect next?
The short answer is that monetary policy is having an effect. Inflation fell to 2.8% in June, bringing it inside the Bank of Canada’s 1%–3% target range, though the central bank’s ideal is 2%. That progress doesn’t erase the pain: some categories, notably food, remain elevated—grocery prices were up 9.1% year-over-year in June—while energy prices have eased largely because they were unusually high a year earlier.
So how much more financial strain might lie ahead, and could interest rates climb further in Canada?
The impact of BoC rate hikes so far
When the Bank of Canada changes its policy rate, commercial lenders typically follow, and that ripple affects savers and borrowers in opposite ways. Savers have benefited from higher yields—for example, some GIC rates are now above 5%—while people with variable-rate debt or maturing fixed-rate mortgages have seen payments rise. The discounted five-year fixed mortgage rate climbed from under 1.5% in late 2020 to over 5% by July 2023, a dramatic change that can add roughly $1,000 per month on a $500,000 mortgage compared with the low-rate environment.
Why it’s hard to predict interest rates in Canada
Forecasting interest rates is difficult because Canada is influenced by global events as well as domestic conditions. While inflation and rates move in cycles and will likely ease over time, the timing and magnitude of that easing depend on factors such as consumer demand, labour-market strength and housing activity. RBC chief economist Craig Wright has suggested that additional hikes may not be necessary right now, warning that extra increases risk hurting the economy.
The BoC, however, has signalled that it remains prepared to act if inflationary pressures persist, since demand, employment and housing activity can sustain higher inflation. CIBC Capital Markets economist Andrew Grantham has highlighted the risk of at least one more 25-basis-point hike if core measures of inflation remain above the bank’s target range.
Past experience shows central-bank guidance should inform but not dictate financial decisions—economic surprises happen. Inflation proved more persistent than many expected after the pandemic-era low rates, and some forecasts that predicted an early end to the tightening cycle were premature. Independent central banks often leave the option of further hikes open, and that can make it hard for forecasters to call the cycle’s end.
How the Bank of Canada’s interest rate affects you
Higher policy rates mean better returns for depositors and greater costs for borrowers. If you have a variable-rate mortgage, a line of credit, or are renewing a fixed term that matured in this higher-rate environment, monthly payments will likely be higher. Conversely, savers can lock in stronger yields on savings accounts and short-term fixed-income products. Thinking about both sides of this balance is important when planning budgets, debt repayment and savings strategies.
Could Canada return to 1980s-style inflation?
Some people worry that today’s inflation might snowball into the runaway inflation of the early 1980s, when rates briefly exceeded 20% and inflation peaked around 12.5%. The drivers then were a specific mix of large oil shocks, expansive fiscal policies, and monetary frameworks that differed substantially from today.
There are important differences today: modern central banks, including the BoC, use explicit inflation targeting—aiming for a 2% goal within a 1%–3% band—which anchors expectations and reduces the risk of a self-fulfilling inflation spiral. Economists quoted by the BoC emphasize that because businesses and households generally expect inflation to revert to 2% over time, the dynamics that amplified inflation in the 1980s are less likely to repeat. A moderate recession could also help bring inflation down, as past downturns have done.
Global headwinds that could keep inflation sticky in Canada
Several international trends could sustain higher inflationary pressure in Canada: the war in Ukraine, more frequent extreme weather that disrupts agriculture and supply chains, and shifts in global trade patterns that accompany partial de-globalization. A pickup in Chinese demand could lift commodity prices—especially metals and energy—adding to inflation pressures. Regulatory and policy shifts aimed at achieving net-zero emissions may also raise costs in some sectors.
Is the BoC’s 2% inflation target still achievable—and desirable?
After inflation peaked at 8.1% in June 2022, some debated whether the BoC should change its target. With CPI down to 2.8% as of June, that debate has quieted. Economists caution that keeping the 1%–3% band, with a 2% midpoint, preserves the Bank’s credibility. Altering the target now could undermine confidence that inflation will return to the goal and could create expectations that make inflation harder to control.
Practically, this means interest rates may remain above the low levels of the last decade for some time as the BoC works to re-anchor inflation at 2%. For households and investors, the outlook calls for cautious planning: expect higher borrowing costs than the pre-pandemic decade, but also opportunities for improved savings returns. Although risks remain, the trend toward lower inflation appears underway.
More about interest rates in Canada:
- What fast-rising interest, inflation and bond rates mean for investors
- The one inflation tool you need for your finances
- What do high interest rates mean for retirement savings?
- How recession fears are shaping investor behaviour and emotions