Bank of Canada Increases Rates and Threatens More

Well, the Bank of Canada certainly means business.  Many people predicted that the Bank would hold interest rates in June and then more seriously consider an interest rate hike in July.  Instead, the Bank of Canada announced that they have increased its key interest rate by 0.25%. The prime rate will be increased from 6.70% to 6.95%. Therefore, for those who have a variable rate mortgage, your payments may increase by about $15 per month for every $100,000 loan.  This interest rate hike increase seems to be having a similar effect as the full 1% increase from July 2022, which jolted the mindset of the market.  

It's my opinion that the Bank saw the rapidly recovering housing market, and decided that they needed to act now to slow the market.  The last thing the Bank wants is more confidence in the housing market, which is a pillar of the economy.  It sounds backwards to want a slow down in housing, but if we are going to get back down to a more manageable 2% inflation, home prices can not be taking off.  Higher home prices means higher upward pressure on wages, which are already steadily increasing 5% year over year.  

Global inflation is coming down, reflecting lower energy prices compared to a year ago, but underlying inflation still remains high. The Bank may need to continue to raise interest rates further to get inflation down to the 2% target

In the first quarter of 2023, Canada's economy was stronger than expected, with GDP growth of 3.1%. Spending on interest-sensitive goods increased and housing market activity has also picked up recently. Excess demand in the economy has been more persistent than anticipated, and there is a continued demand for labour due to higher immigration and participation rates.

CPI inflation was up to 4.4% in April, the first increase in 10 months. Prices for goods and services are higher than expected. The Bank expects inflation to ease to around 3% in the summer. However, with core inflation in the 3.5% - 4% range in the past few months and excess demand persisting, there are concerns that CPI inflation could get stuck above above the 2% target.  

Based on this, the Governing Council has decided to raise the interest rate. Reducing money supply continues to complement the interest rate, and the dynamics of core inflation and outlook for CPI inflation will continue to be assessed. The Bank remains committed to restoring price stability for Canadians and achieving the 2% inflation target.

The next Bank of Canada announcement will be on July 12, 2023.  

If you are feeling the pinch with your mortgage payments, please contact me discuss your options.