The key interest rate for the Bank of Canada has seen the highest increase in more than 20 years after they raised the rate by half a percentage point to one per cent last week.

In a release, the bank said that a lot of factors came into having to raise the rate such as Russia’s ongoing invasion of Ukraine, the constant spike in the inflation rate, and increases in oil and natural gas.

Kenora MP, Eric Melillo, says he expected the interest rate to eventually go up, but now it may cause struggles for home buyers and the federal government’s pocketbook.

“It’s why the government needs a real plan to deal with the cost of living concerns,” said Melillo. “The government has used low-interest rates as a justification for borrowing more money and piling on the spending recently, and now that the rate that the government pays is also going to be going up, you look at the budget last week that has no plan to get back to balance.”

Due to the COVID-19 pandemic, on March 27, 2020, the Bank of Canada was forced to lower its key interest rate to 0.25 per cent. The bank later raised its interest rate for the first time in two years on March 2, 2022, to 0.5 per cent.

The budget includes $10.2 billion in funding to build more affordable homes and help people finance their first homes through a tax-protected saving program, as well as $475 million for a one-time $500 payment to Canadians facing ‘housing affordability challenges’. Ontario’s Municipal Affairs Minister, Steve Clark, later praised the moves.

In March the Canadian Real Estate Association said in a February report showed that the average price in Ontario was a record-high $1,086,493, an increase of 25.8 per cent from February of 2021.

The more comprehensive year-to-date average price was $1,052,139, a sizable gain of 25.7% from the first two months of 2021.

In Kenora, the average price in 2022 for an entry-level two or three-bedroom family home is between $275,000-and $300,000.

The bank said the housing market was strong in the first quarter, but it expected sales to soften somewhat in the second quarter as mortgage rates rise.

The Bank of Canada also returned its estimate for the nominal neutral rate to its pre-pandemic level of a range of two per cent to three per cent. The bank’s April 2021 estimate was a range of 1.75 per cent to 2.75 per cent.

Melillo notes with the interest rate increasing that will have impacts on the recently announced federal budget and cause major restrictions as a country.

“We’re projected in this budget with the government's own numbers to pay over $40 billion a year on interest alone.”

“That’s nearly as much spent on health transfers, it’s more that was allocated in this budget to end First Nation drinking water advisories, it’s more that was allocated to improve highway infrastructure. There certainly is a lot more with this country if we weren’t saddled with this debt.”

Overall, Canada’s deficit is expected to drop to $113.8 billion. That’s an improvement over previous projections, where the 2022 deficit was expected to be about $154 billion as of the 2021 budget. Deficits are expected to drop to $52 billion by 2023 and to about $8 billion by 2027.

The central bank’s next interest rate announcement is set for June 1, while its next monetary policy report, which will include its updated outlook for the economy and inflation, is scheduled to be released along with the bank's July 13 interest rate decision.

With files from the Canadian Press.