On June 1st the Bank of Canada raised its overnight benchmark rate to 1.50%. This latest 50 basis point increase follows the same increase in April, making it the most aggressive central bank rate increase in Canada in over 20 years.
The Bank also signaled that more rate hikes are likely. The Bank said it is willing to act “more forcefully” in order to bring rising inflation risks back under control. “The risk of elevated inflation becoming entrenched has risen,” the BoC said. “With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term…interest rates will need to rise further,” it continued. “The Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target.”
Impacts of Today’s Rate Hike for Borrowers
Consumers with variable-rate mortgages and lines of credit are about to see their monthly interest costs rise once again. Most of the big banks have already announced increases to their prime lending rates, bringing them to 3.70% from 3.20%. For those with variable rate mortgages and loans, where monthly payments can fluctuate, a 50-bps increase translates into roughly $25 more per month per $100,000 of debt, based on a 25-year amortization.
Market Impacts
The housing market is beginning to moderate in many areas of Canada, slowing from an exceptionally high pace of sales and price increases. Ming Wong, COO of pololoans, states that “Previous rate increases have seen a higher supply of homes, with a decrease in home prices in some markets. Home buyers now have a wait and see attitude, hoping home prices will decrease further”. There is a potential upside, however, as “more inventory will bring some buyers and investors who have cash flow as well as immigration may help the market as well” according to Joe DiGiambattista from pololoans.
What’s Next?
The pace of future rate increases will be guided by the Bank’s ongoing assessment of the economy and inflation. In case there was any doubt, the Bank’s message was clear: it is prepared to act more forcefully if needed to meet its commitment to achieve its 2% inflation target. RBC’s Robert Hogue commented that “… this doesn’t sound like a central bank that is planning to pause at 2%.” July 13, 2022 is the date of the BoC’s next scheduled policy announcement, with most economists expecting a further 50 to 75 basis point rate hike on that date.
If you would like to discuss what impact the changing interest rates might have on your ability to qualify for financing, don’t hesitate to get in touch. I am happy to refer you to a reputable mortgage broker that can provide you with a thorough consultation.