The Bank of Canada raises the overnight lending rate by another 0.25%
Information provided by Darcy Doyle at the Mortgage Professionals: As your Mortgage Professional, our mission is to provide you with the most up-to-date, accurate, and useful information and advice to navigate the complex world of mortgages. We understand that the past year has been challenging for many, with the endless rate increases affecting the housing market and mortgage industry in significant ways.
Let's stay positive, stay informed, and stay focused on building a brighter future together. We are here to support you every step of the way, ensuring you have the knowledge and guidance needed to make informed decisions about your mortgage journey.
Topics covered in our July 12th Rate Announcement Blog:
-
June 7th rate announcement Re-cap
-
Today’s rate announcement: July 12th
-
How does inflation affect your mortgage?
-
How do changes in interest rates affect inflation?
-
The resiliency within the Canadian housing market
-
A Booming Job Market: A Double-Edged Sword
-
Why does the Bank of Canada keep increasing rates?
What happened in the last announcement
On June 7th, the Bank of Canada made a notable move by increasing the overnight policy rate by 25 bps to 4.75%. This decision reinforces their commitment to bringing inflation down to 2%. As a result, both fixed and variable mortgage rates were expected to rise. The central bank aims to address the accumulation of evidence, including robust output growth, increased inflation, and a rebound in the housing market. This decision reflects their determination to eliminate excess demand in the economy, ensuring a sustainable balance between supply and demand. Governor Tiff Macklem and his team view this demand as more persistent than initially anticipated.
The Bank of Canada has increased its overnight interest rate target to 5%, addressing persistent inflationary pressures. Tight labour markets and robust demand contribute to ongoing inflation in services. The global economy is projected to grow around 2.8% this year.
In Canada, consumption growth exceeded expectations at 5.8% in Q1. While consumer spending is expected to slow due to interest rate increases, recent data suggests continued excess demand. The housing market has seen an upturn, with limited supply leading to higher prices. Labour market conditions remain tight, with 4-5% wage growth.
Economic growth is expected to slow, averaging around 1% in Q2 2023 and Q1 2024. Inflation eased to 3.4% in May but underlying pressures persist. CPI inflation is projected to hover around 3% before gradually declining to 2% by mid-2025.
The Bank remains committed to price stability and will assess core inflation dynamics, expectations, wage growth, and corporate pricing behaviour. By raising interest rates, the Bank proactively manages inflationary pressures. This decision ensures long-term stability and aligns with the 2% inflation target.
Inflation, how it affects your mortgage
Inflation can have significant effects on your mortgage. However, the degree of impact can vary greatly depending on the type of mortgage you hold.
- If you have a fixed-rate mortgage, your monthly payments are predetermined at the start of your loan term and remain constant over time. This means that despite the external economic conditions and fluctuations, including inflation, your mortgage payments won’t change. In essence, you enjoy the peace of mind knowing exactly how much you have to pay each month for the duration of your loan term, regardless of any rise in the cost of living.
- On the other hand, if you have a variable-rate mortgage, your situation could be quite different. Variable rates can adjust over the life of your loan based on changes in the market interest rate, which can be influenced by inflation. When inflation rises, the central bank will increase the Prime Lending Rate to mitigate its effects, as we have seen over the past year. As a result, your monthly variable-mortgage payments will begin to increase until you reach what many have come too familiar with: Your trigger rate.
-
Why does the Bank of Canada keep increasing rates?
The first quarter saw stronger-than-expected Canadian GDP growth, another indicator of a recovering economy. While this economic boom is good news for many, it does have other effects that may not be as positively viewed.
Strong GDP growth puts the Bank of Canada in a position where it might consider rate hikes to control inflation. This could increase the interest rates for new variable-rate mortgages and those up for renewal, influencing the cost of homeownership.
In a significant decision, the Bank of Canada announced a 25 basis points hike in the policy rate. This marks an aggressive step towards tightening monetary policy, which will affect Canadians with variable-rate mortgages and those about to renew their mortgages.
The increased policy rate makes borrowing more expensive, potentially slowing the pace of real estate investment. It’s critical for borrowers to reassess their short and long-term financial plans and consider locking in a fixed rate to mitigate the potential impact of future rate hikes.
Conclusion
What This Means for Your Mortgage
The Bank of Canada’s recent rate announcements may have wide-reaching implications for the mortgage environment. It’s important for current and potential homeowners to stay informed and consider how these changes might affect their mortgage payments and overall financial stability.
Navigating the current landscape of the Canadian mortgage market presents various challenges. While inflation and rising interest rates impact the broader economy, their effects on individual mortgages can significantly differ based on whether one holds a fixed or variable-rate mortgage. The robust housing market, coupled with the rate hikes by the Bank of Canada, has led to a surge in demand for fixed-rate mortgages, reflecting a trend of risk aversion among homeowners.
Interestingly, Canada’s strong job market and GDP growth might also influence the central bank’s policy rate, and thus mortgage rates. These economic improvements might induce rate hikes aimed at controlling inflation, which could increase costs for homeowners, particularly those with variable-rate mortgages or upcoming renewals. The recent 25 basis points increase signals a possible trend towards higher borrowing costs, leaving many borrowers to reassess their financial plans and consider whether locking into a fixed rate is best for them.