Bank of Canada increased its target for overnight rate to 1%

Apr 30, 2022

On April 13th, the Bank of Canada increased its target for the overnight rate to 1%, with the Bank Rate at 1.25% and the deposit rate at 1%. The Bank is also ending reinvestment and will begin quantitative tightening (QT), effective April 25th. Maturing Government of Canada bonds on the Bank’s balance sheet will no longer be replaced and, as a result, the size of the balance sheet will decline over time. 

The factors behind this increase are due to a variety of reasons. Although the recovery from the COVID-19 pandemic has been strong in some regions, there are other regions where it has not been strong. The US economy is growing at an exponential rate, but China’s economy is struggling due to weakness in its property sector. Globally, we also see a supply chain issue that has hindered production and is pushing up inflation to levels unseen since the financial crisis in 2008. Importantly, global tensions are also primary drivers of a substantial upward revision to the Bank’s outlook for inflation in Canada, specifically the Ukraine-Russian tension, are causing some uneasiness in the stock and crypto markets. 

Alongside the high inflation, housing prices are currently very high, and the elevated housing market activity puts upward pressure on house prices. This will make it even more challenging for first-time homebuyers to enter the market. Buyers are facing high pressure, with multiple offers on property being the normal occurrence, some offers far above asking price and/or without subjects in place. As mortgage brokers, we are seeing the challenges our clients are facing when participating in this market. As the home prices rise due to this behaviour, it makes purchasing (especially for first time buyers) more and more unattainable.

Although the COVID-19 recovery is far from over, and tensions worldwide are likely to remain for the foreseeable future, life is starting to stabilize, and with that, the stock market, inflation rises, and housing prices could see a flattening out in the months and years to come. Inflation is likely to decline reasonably to 3% by the end of this year and ease back towards the target over the projection period. In the United States, domestic demand remains very strong and the US Federal Reserve has clearly indicated its resolve to use its monetary policy tools to control inflation. As policy stimulus is withdrawn, US growth is expected to moderate to a pace more in line with potential growth. Global financial conditions have tighten and volatility has increased. The Bank now forecasts global growth of about 3.5% this year, 2.5% next year, and 3.25% in 2024.

We want to reiterate that high inflation will not simply disappear due to one budget or one policy change. If we are focused on inflation it is going to take a collection of events nationally and worldwide over the next few years that will see a steady more flat line of growth in future years.

We expect the Bank of Canada to increase the rates again by some point this year. We want to assure you to not stress over the potential Bank of Canada overnight lending rate. If you have a variable mortgage you are paying significantly lower rates then fixed rates.

We are expecting at least one more 0.25% increase over the course of this year. If you are wondering how it will effect you, let’s break it down:

If your balance is say $400,000 with a 30 year amortization, then for every $100,000 owing, your monthly payment will increase by about $13 – translating to roughly a $52 increase per month. 

If you are not feeling great about these increases then did you know that there are variable rate products on the market that allow the payment to remain consistent while enjoying the benefits of the variable rate gamble? If you have been considering making the switch to fixed, have you considered how early payout penalty structures might impact you? 

These are big questions and if you have any questions at all, please reach out to us, and we will do our best to answer them in a timely matter. 

Uncertainty can be stressful and at GLM Mortgage Group, we are always available to answer questions and update our clients regarding their mortgage, current rates and market conditions in order to make educated and informed decisions about their financial livelihood. 

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