Bank of Canada Holds Rate as Inflation Hits Highest Level In 10 Years

The Bank of Canada announced that it is holding its key lending rate at 0.25% noting that rising inflation is only temporary. While the central bank might say inflation will cool down later this year, right now, inflation is at it’s highest level in 10 years. This is making everything from gas to food, clothing, and housing more expensive. Rising prices will be difficult for the average Canadian to absorb with household dent levels still near record levels.

How Does Rising Inflation Affect Me?

The Bank of Canada announced recently that it is keeping its key lending rate on hold at 0.25%. The rate has been at record lows since the coronavirus pandemic started in early 2020 and said it won’t increase the rate until the Canadian economy has recovered.

The central bank said it expects the Canadian economy to rebound sharply this summer, juiced by consumer spending, as the vaccine rollout continues, and provincial governments ease their restrictions. This should result, it said, with annual inflation hovering around three percent.

The Bank of Canada was close. In May, the inflation rate increased to 3.6%, the fastest pace in a decade. The May 2021 inflation figure also outpaced the 3.4% reading from April, which was, at the time, the fastest annual rate in nearly a decade.

Part of the huge rise in inflation can be blamed on the low levels seen last year at this time. Because of the coronavirus pandemic and quarantine orders, the prices for items like gas, furniture, and food were in the doldrums.

But even Statistics Canada says you can’t blame all of the year-over-year increase in inflation on COVID-19. Price pressures, which includes rising housing prices, and supply chain issues are also part of the reason why inflation is rising so quickly.

Prices for every day items are expected to rise over the summer. To make up for lost revenue and rising prices, businesses are expected to pass those increases onto consumers.

But as one Bay Street analyst said, Canadian’s shouldn’t worry about higher prices, because we can “actually absorb those costs, maybe like never before because of all the savings that is built up during the pandemic.”

This might be a little tone deaf. Rising prices coupled with lockdowns, high household debt levels, and an unemployment rate above 8.0% will make it increasingly difficult for the average Canadian to get by.

The pandemic has been tougher on lower income earnings, especially those who work in retail, restaurants, and bars—many of whom lost their jobs during the pandemic. According to one survey, 34% of Canadian say they are worse off now than they were a year ago. Just 20% say they are better off. Of those, 46% of those making less than $25,000 said they were worse off and 38% of Canadians who make less than $50,000 said the same.

Despite encouraging words from Bay Street bankers, most Canadian do not think rising inflation will ease any time soon. When asked about the next six months, a whopping 85% said they expect groceries to be more expensive with 84% saying they expect gas to continue to rise.

Again, rising prices will be difficult to absorb. And not just because things are more expensive. Canadian household debt levels are still at eyewatering levels. For every dollar of disposable income Canadians have, they own $1.72 in debt.

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