CBJ — In a surprisingly aggressive move to combat inflation, the Bank of Canada has increased its overnight trendsetting rate by a full percentage point, taking it to 2.5%.

The move comes as a surprise to most economists and investors, who had felt a 75-point basis point increase was coming.  That expected increase had many people concerned, but this goes even further.  Clearly, the bank feels inflation remains out of control and as such took the drastic measure.  Such a huge single increase has not been taken since 1998.

The optimal inflation rate set by the bank is 2%, but some financial analysts now believe that rate might need to be doubled or a recession early next year is almost a certainty. The peak monthly inflation rate recently hit 7.7%.

Anyone on a fixed rate loan is immune from higher rates for now because they’ve locked in, but one of the biggest impacts of the new 2.5% rate is that it will be harder for first-time home buyers as well as those who need to refinance their mortgage if their current term is coming to an end, or if they they are on a variable-rate mortgage term, as those monthly payments will be on the rise once the individual banks determine their own rates. Those consumers and businesses that were already stretched to the financial limit may find even tougher financial times ahead.

@CanBizJournal