On Wednesday, the Bank of Canada made a significant decision to raise its benchmark interest rate to 4.75 per cent. This marks the first time since January that Canada’s central bank has increased its trend-setting interest rate. In January, the bank had indicated its intention to temporarily halt its aggressive rate hike campaign to evaluate the impact on inflation.
However, recent data has demonstrated the unexpectedly strong resilience of the Canadian economy, surpassing growth expectations. After nine consecutive months of decline, the inflation rate unexpectedly rose last month.
The bank’s latest action to elevate its target for the overnight rate from 4.5 per cent to 4.75 per cent now positions the bank’s benchmark rate at its highest level since 2001.
Although some investors and economists had entertained the possibility of a rate increase, the decision nevertheless surprised the consensus view that the bank would likely postpone such a move until later this year.
However, analysts and observers are now increasingly confident that there will be further rate hikes in the future. Trading in investment instruments called swaps has fully factored in at least one more hike before the year’s end, with the possibility of additional increases to 5.25 per cent or even higher.
Unfortunately, this move by the central bank will result in higher costs for individuals with variable rate mortgages, as many have already experienced significant payment increases this year. The rate hikes that have been announced thus far have already added over $1,000 to the monthly payment of a $500,000 mortgage, and this is prior to the latest increase announced on Wednesday.
Following the central bank’s decision, Canada’s major banks promptly followed suit by increasing their prime lending rates to 6.95 per cent.
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