Why the interest rate increased and why it's not 'what workers want to hear'

Inflation down, but that's not the whole story BNN Bloomberg's Amber Kanwar says although inflation numbers seem positive, the news is less glowing upon a closer look.

The Bank of Canada raised key interest rates one-quarter of a percentage point on Wednesday.

This brings the central bank's rate to five per cent, making it the highest in 22 years.

One expert told CTV's Your Morning on Wednesday ahead of the hike that "mixed messaging" on inflation would likely play into the bank's decision.

"Certainly when we look at the inflation numbers they've been coming down fairly regularly," David Macdonald, senior economist at the Canadian Centre for Policy Alternatives, said, adding lower gas and energy prices are contributing to the drop.

Macdonald said due to past rate hikes, mortgage interest rates and rent are increasing inflation.

"We're in an interesting predicament at this point, that house prices are not falling quickly enough to offset these higher mortgage costs," he said. "And therefore higher interest rates are making inflation slightly worse."

This hike would have a "relatively limited impact" on homeowners, Macdonald said.

"The real factor is how long higher rates stick around. So whether it's four and three-quarters, or five is to some degree neither here nor there," he said. "The question is, how many Canadians are going to be forced to renew with these higher rates?"

Another key area driving inflation is the labour market, Macdonald said.

"While unemployment has gone up over the past two months, that's largely because more people are encouraged by the job market, and they're looking for work, and if you look for work then you count as unemployed," he said.

In the positive labour market, hourly wage rates are increasing faster than the rate of inflation, Macdonald said.

"This continued strength in the job market, I think is likely what will drive a higher interest rate," he said. "More people need to be unemployed…I don't think that's what workers want to hear, but that's what the bank wants to see."

To watch the full interview click the video at the top of this article.