Variable Rate increases by 0.50%
Bank of Canada has raised their overnight rate by 0.50%, bringing it to 3.75%. Which for most lenders will likely increase their Prime rate to 5.95% from the previous 5.45%.
This change will have an impact on those with a Variable Rate Mortgage or Home Equity Line of Credit. It will mean a $29 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 within the next 3yrs? 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.
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 benchmark interest rate 50 basis point to 3.75% from 3.25% in September. This is the sixth time this year that the Bank has tightened money supply to quell inflation, so far with limited results.
Some economists had assumed the increase this time around would be higher, but the BoC decided differently based on its expert economic analysis. We summarize the Bank’s observations below, including its all-important outlook:
Inflation at home and abroad
Inflation around the world remains high and broadly based reflecting the strength of the global recovery from the pandemic, a series of global supply disruptions, and elevated commodity prices
Energy prices particularly have inflated due to Russia’s attack on Ukraine
The strength of the US dollar is adding to inflationary pressures in many countries
In Canada, two-thirds of Consumer Price Index (CPI) components increased more than 5% over the past year
Near-term inflation expectations remain high, increasing the risk that elevated inflation becomes entrenched
Economic performance at home and abroad
Tighter monetary policies aimed at controlling inflation are weighing on economic activity around the world
In Canada, the economy continues to operate in excess demand and labour markets remain tight while Canadian demand for goods and services is “still running ahead of the economy’s ability to supply them,” putting upward pressure on domestic inflation
Canadian businesses continue to report widespread labour shortages and, with the full reopening of the economy, strong demand has led to a sharp rise in the price of services
Domestic economic growth is “expected to stall” through the end of this year and the first half of next year as the effects of higher interest rates spread through the economy
The Bank projects GDP growth will slow from 3.25% this year to just under 1% next year and 2% in 2024
In the United States, labour markets remain “very tight” even as restrictive financial conditions are slowing economic activity
The Bank projects no growth in the US economy “through most of next year”
In the euro area, the economy is forecast to contract in the quarters ahead, largely due to acute energy shortages
China’s economy appears to have picked up after the recent round of pandemic lockdowns, “although ongoing challenges related to its property market will continue to weigh on growth”
The Bank projects global economic growth will slow from 3% in 2022 to about 1.5% in 2023, and then pick back up to roughly 2.5% in 2024 – a slower pace than was projected in the Bank’s July Monetary Policy Report
Canadian housing market
The effects of recent policy rate increases by the Bank are becoming evident in interest-sensitive areas of the economy including housing
Housing activity has “retreated sharply,” and spending by households and businesses is softening
Outlook
The Bank noted that its “preferred measures of core inflation” are not yet showing “meaningful evidence that underlying price pressures are easing.” It did however offer the observation that CPI inflation is projected to move down to about 3% by the end of 2023, and then return to its 2% target by the end of 2024. This presumably would be achieved as “higher interest rates help rebalance demand and supply, price pressures from global supply chain disruptions fade and the past effects of higher commodity prices dissipate.”
As a consequence of elevated inflation and current inflation expectations, as well as ongoing demand pressures in the economy, the Bank’s Governing Council said to expect that “the policy interest rate will need to rise further.”
The level of such future rate increases will be influenced by the Bank’s assessments of “how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding.”
In case there was any doubt, the Bank also reiterated its “resolute commitment” to restore price stability for Canadians and said it will continue to take action as required to achieve its 2% inflation target.
December 7, 2022 is the BoC’s next scheduled policy interest rate announcement. First National will follow the Bank’s commentary and outlook closely and provide an executive summary on our website the same day. For other capital market insights, please visit the Resources page of our website on a regular basis.
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