The Bank of Canada has increased benchmark overnight rate by 0.75%, to 3.25% – this brings Prime Rate (the rate most of us consumers care about) to 5.45%. This is the highest prime rate has been since 2008 and brings borrowing costs to a level the Bank of Canada believes will start to actively cool the country’s economy, the so-called neutral range for rates, which neither stimulates nor restricts activity. This move also leaves Canada with the highest policy rate among major advanced economies.
While shocking to some, this rate hike was widely expected by economists and many had thought that it would be the end of the rate hiking cycle. Comments made today signalled there may be more to come, but they have dropped the references to “front loading” these rate hikes, which would suggest we are in for smaller adjustments in the future.
“As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target,” the bank said.
Why do rates keep climbing?
Economy & Inflation are the culprits. Growth in our economy matters but when we pair high economic growth (our spending spree as the result of being locked down for 2 years) with high inflation this is what is causing the Bank of Canada to be more aggressive than usual. In order to tame and reign in inflation (which is their primary concern), the increase in rates restricts the economy, and our propensity to spend, which undoubtably has a slowing effect on our economic growth.
These decisions by the bank of Canada are important to us all for the path we are headed down, but mainly only impacts variable rate mortgage holders, or balances on lines of credit. Anything that has an interest rate that is tied to Prime.
We hope we are nearing the top end of the rate hiking cycle and to remember that a rate tightening cycle is always followed by a reduction in rates, when inflation is back under control and when the economy needs to be spurred into more action and growth (out of a recession that is almost certain to come).
If you are concerned about how this affects you and your mortgage, please reach out to us today! We would love to chat through how this change affects you and the options that are available.