As widely expected for today's rate announcement, the Bank of Canada has raised their policy rate to 5%. Another .25% mirroring the last increase back on June 7th. This is now the 10th rate increase since early 2022. 

The Bank of Canada stated that "Canada’s economy has been stronger than expected, with more momentum in demand. Consumption growth has been surprisingly strong at 5.8% in the first quarter. While the Bank expects consumer spending to slow in response to the cumulative increase in interest rates, recent retail trade and other data suggest more persistent excess demand in the economy. In addition, the housing market has seen some pickup. New construction and real estate listings are lagging demand, which is adding pressure to prices. In the labour market, there are signs of more availability of workers, but conditions remain tight, and wage growth has been around 4-5%. Strong population growth from immigration is adding both demand and supply to the economy: newcomers are helping to ease the shortage of workers while also boosting consumer spending and adding to demand for housing." It is still unclear if this will be the final rate increase we see as there are still 3 more rate announcements scheduled for this year, and the BoC has made it clear they will continue to do what is needed to bring inflation back down to the 2% range. 

The overnight rate affects revolving debt such as lines of credit, and variable rate mortgages. Many Canadian homeowners that carry a variable rate mortgage have already felt the implications of these rate increases, with many Canadians approaching, or even reaching their trigger point which is where their monthly payment is no longer able to cover the interest charged, and are now forced to increase their payments to cover the interest. These rate increases will also affect new home buyers considering buying a home. If the home buyer chooses to go with a variable rate mortgage, this increased rate will decrease the amount they are able to qualify for.

It is important to note that not all interest rates are affected when the Bank of Canada increases the policy rate. For example fixed interest rates are not tied to the policy rate and are not affected by these increases. The 5 year fixed rate is still lower in comparison to the variable rates, but have also increased since early 2022 as they are tied to Government bond yields which have also increased.

If you are planning to purchase a home in the near future it is important to speak with a mortgage professional and weigh your options, and strategize your mortgage lending so that you don't get stuck over paying interest in the long run. The reality is, these rates will eventually come down again. Never likely to the 2.5% we saw in recent years, but they will most certainly subside once the government reaches their 2% inflation rate so that the economy doesn't get pushed into a recession. The only question is when will this happen. Originally, the Bank of Canada forecasted they intend to reach 2% in 2024. This has now been adjusted by 2 fiscal quarters, and they now say 2025. A good mortgage specialist will help you decide on what type of mortgage will be best for you so you don't overpay in the long run, and can take advantage of lower interest rates in the future. I have mentioned some strategies in a previous blog that you can find below.

The next policy rate announcement for The Bank of Canada is scheduled for September 6, 2023.