Variable Rate Increases by 0.25%
Bank of Canada has raised their overnight rate by 0.25%, bringing it to 4.75%. Which for most lenders will likely increase their Prime rate to 6.95% from the previous 6.70%
This change will have an impact on those with a Variable Rate Mortgage or Home Equity Line of Credit. It will mean a $15 a month payment increase for every $100,000.
Those with a fixed rate mortgage won't be affected by raising rates until they come up for renewal.
What is the Bank of Canada Overnight Rate?
The overnight rate is generally the interest rate that large banks use to borrow and lend from one another in the overnight market.
The Bank of Canada holds this Key Lending rate. They might lower it to encourage borrowing and spending OR they may increase it to curb inflation and debt levels.
Major lenders typically raise their prime rate when there is a hike. Thats the number they use to set interest rates for loans and mortgages.
Unlike a fixed rate where one is locked in to their rate, those in a variable rate will be affected by these changes. Home owners with fixed rate mortgages won't be affected until they have to renew.
Should I lock into a Fixed Rate now?
Historically variable rates have shown to save you more money in the long run.
A few things you should consider before locking into a Fixed rate is:
Are you planning to sell your home in the near future? Then we would highly recommend you stay in your variable rate mortgage.
Can your budget handle a payment increase if rates go up?
Will you be putting extra money down on your mortgage each month? If so, the savings from a variable rate can help you pay down your mortgage faster.
If you are considering locking in, give us a call to discuss first. We have a fun little calculator to help you forecast your savings if you decide to stay with your variable rate.
Whats to come??
Source: First National - one of Canada's largest non-bank mortgage lenders, offering both commercial mortgages and residential mortgage solutions.
Today, the Bank of Canada increased its overnight interest rate to 4.75% (+0.25% from April) because of higher-than-expected growth in Canada’s economy in the first quarter and the view that monetary policy was not yet restrictive enough to bring inflation down to target.
Leading up to today’s announcement, many economists feared that the BoC would have no choice but to raise rates in the face of persistent inflation and recent GDP growth. Their fears were founded.
To understand the Bank’s thinking on this important topic, we highlight its latest observations below:
Inflation facts and outlook
In Canada, Consumer Price Index (CPI) inflation “ticked up in April” to 4.4%, the first increase in 10 months, with prices for a broad range of goods and services coming in higher than expected
Goods price inflation increased, despite lower energy costs
Services price inflation remained elevated, reflecting strong demand and a tight labour market
The Bank continues to expect CPI inflation to ease to around 3% in the summer, as lower energy prices “feed through” and last year’s large price gains “fall out” of the yearly data
However, with three-month measures of core inflation running in the 3.50%-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target
Canadian housing and economic performance
Canada’s economy was stronger than expected, with GDP growth of 3.1% in Q1 2023
Consumption growth was “surprisingly strong and broad-based,” even after accounting for the boost from population gains
Demand for services continued to rebound
Spending on “interest-sensitive goods” increased and, more recently, “housing market activity has picked up”
The labour market remains tight: higher immigration and participation rates are expanding the supply of workers but new workers have been quickly hired, reflecting continued strong demand for labour
Overall, excess demand in the economy looks to be “more persistent” than anticipated
Global economic performance and outlook
Globally, consumer price inflation is coming down, largely reflecting lower energy prices compared to a year ago, but underlying inflation remains stubbornly high
While economic growth around the world is softening in the face of higher interest rates, major central banks are signalling that interest rates may have to rise further to restore price stability
In the United States, the economy is slowing, although consumer spending remains surprisingly resilient and the labour market is still tight
Economic growth has essentially stalled in Europe but upward pressure on core prices is persisting
Growth in China is expected to slow after surging in the first quarter
Financial conditions have tightened back to those seen before the bank failures in the United States and Switzerland
Summary and Outlook
The BoC said that based on the “accumulation of evidence,” its Governing Council decided to increase its policy interest rate, “reflecting our view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.”
The Bank says quantitative tightening is complementing the restrictive stance of monetary policy and normalizing the Bank’s balance sheet.
Going forward, the Bank said it will continue to assess the dynamics of core inflation and the outlook for CPI inflation with particular focus on “ evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving” its inflation target.
Once again, the Bank repeated its mantra that it “remains resolute in its commitment to restoring price stability for Canadians.”
Next Rate Decision
July 12, 2023is the Bank’s next scheduled policy interest rate announcement.