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Final Bank of Canada Rate Increase? (#6)

by | Jan 27, 2023

Final Bank of Canada Rate Increase?

You have likely recently learned that signs are pointing towards an ease of inflation with the economy softening. You may have heard this in a variety of ways, from watching some of your stocks start to go up, hearing the term “bull” market in crypto, seeing relaxed spending in individuals or other such things.

Believe us when we say that this is great to see and we are very happy a more relaxed economy is taking shape. That being said, it is not at acceptable levels and we are now approaching what we believe is the final Bank of Canada rate increase. Although we are seeing a decrease in inflation in some areas, you probably recently visited a grocery store to see the price of meat, chicken in particular, skyrocket. These types of eye popping inflation numbers are still being seen as worrisome.

With that said, you have likely now heard the news that the Bank of Canada has announced its eighth consecutive rate increase, boosting their key rate another 25bps to 4.50%. That will drive the prime rate to a two-decade high of 6.70% (yes you heard that right).

You probably remember that it was only 14 months ago that floating-rate borrowers were enjoying record-low rates like 0.85%. Crazy times.

Is this all bad news? 

Not at all, in fact, the good news is hidden in the words. Although it is easy to see a negative connotation from another hike rate, it is also said to likely be the last of the hike rates. The Bank says it expects CPI inflation to fall “down to around 3% in the middle of this year. This should give you hope since 3% is the top of the Bank of Canada’s inflation target. Its overall goal is to see CPI inflation at the 2% midpoint target next year.

We do not know how key interest rates will change in the coming months. It is likely that they will put a pause on all increases for the time being, but expect it to be a few months or more because they start to lower it again. A few markets expect that the next Bank of Canada move will be a rate cut, but that we should not expect it to come until October. For these reasons, we believe this will be the final Bank of Canada rate increase

Will Interest Rates ever go down?

You have likely heard the saying, “what goes up will eventually come down.” Now, for inflation, that is hard to justify. On one hand, yes the rate of inflation will drop over time as the Bank of Canada continues its tough measures on the economy. On the other hand, a lot of these expensive prices may be here to stay. For example, if something you bought went up 14% during the past 2 years, then it will likely stay at that price, but with lower inflation it will only marginally go up in the future (2% a year).

In terms of interest rates though, that is an intriguing question. Certainly interest rates will go down as the economy improves, but the 1990s, early 2000s saw extraordinarily low interest rates which were supported by the disinflationary force of globalization. It will be interesting to see how interest rates change as the new era of our economy takes shape. Next week we will be writing a blog on where interest rates may go in the future.

How will this Interest Rate Hike affect Mortgages?

The key interest rate hike jumped up by 25 basis points and as we said above, Canada’s benchmark prime rate is now at 6.70%. This means that payments on Canada’s average adjustable-rate mortgage will jump by about $14 a month on every $100,000 of mortgage balance.

The federal stress test rate will climb to;

  • 8.70% or higher on HELOCS
  • 7.50% on the lowest insured variable rates
  • 8.15% on the lowest uninsured variable rates.

Always do your research before deciding to enter the mortgage market or redoing your mortgage. Make sure you understand how this will affect you and your region/market and understand how you could be affected if this was or was not the final Bank of Canada rate increase. Do not get discouraged by these trying times. It is always best to enter the market when you are ready. If you feel ready or have any questions, give us a call and we will be happy to help answer any and all questions and inquiries!

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