Bank of Canada Increased Benchmark Interest Rate Again!

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What is the Bank of Canada's overnight benchmark interest rate as of April 13, 2022?

For the second time in under 2 months, the Bank of Canada (BoC) raised its overnight benchmark interest rate taking the rate to 1.00%, a 0.50% increase since its last interest rate increase on March 2, 2022. Combined, the BoC raised the overnight rate by 0.75% year to date. To put things into perspective, the last time Canada saw a rate increase of 0.50% was 22 years ago. This action today was taken by the Bank of Canada in a continued effort to curb the current growing inflation rate.

As a result of this hike in the overnight rate, I expect the Prime rate to increase to 3.20% from today's 2.70% in the next coming days as per usual historic trends. Given this fact, as Canadians we can expect to see borrowing costs continue to rise, which is a trend that we have been seeing across the board with mortgage lenders.

The writing has been on the wall for a while now, and we can expect more rate increases over 2022 and even into 2023. In a gathering of central bankers last month, Sharon Kozicki, the Deputy Governor for the Bank of Canada made mention of the BoC's mandate to aggressively fight inflation.

How will the increase in the overnight benchmark interest rate affect mortgage rates?

As we have been seeing steady increases in mortgage interest rates since the beginning of the year, rates are reaching high's that have not been seen since 2018. After the announcement of the 0.25% increase back in March, Canadian Banks have also increased their Prime Rate by 0.25% from 2.45% to 2.70% as of March 8, 2022.

As the BoC continues to increase the overnight rate, we can expect the banks to continue raising the Prime Rate. As a result, I expect variable rate mortgages, which we have already seen increase since March, to continue increasing throughout 2022 and even 2023. The reason for this is that variable rates are tied directly to the Prime Rate.

The fixed rate, however, is more closely related to overall Canadian monetary policy and bond rates as discussed in the article What Causes Mortgage Rates to Rise and Fall. As a result of growing bond yields and the current monetary policies in place, we can also expect fixed mortgage rates to continue growing.

As mortgage rates increase, the government will need to step in to ensure that it does its part to help ensure that homeowners and homebuyers are getting into mortgage contracts that they will be able to continue to afford. This is where it may become more difficult for borrowers to qualify for new mortgages or mortgage refinances.

With rates rising, passing the mortgage stress test will become increasingly difficult for borrowers to qualify for the mortgages that they need with traditional mortgage lending institutions, such as banks and monoline mortgage lenders.

Increases in the mortgage stress test will force more borrowers to turn to alternative lenders such as trust companies, credit unions, and even private lenders. These options can come with even higher rates and additional fees.

Furthermore, with rates increasing, so too will monthly mortgage payments when mortgages that were taken out during the last few years of record low mortgage rates come up for renewal. At this point, in order to avoid a surge in mortgage defaults, we might see the reintroduction and much wider adoption of the 40-year amortization period. Although this is currently available through a select few alternative lenders, it has not been available at mainstream banks in several years.

Why did the Bank of Canada increase the overnight benchmark interest rate again?

In addition to inflation, there are several other factors that contributed to the state of Canada's economy and therefore also contribute to today's interest rate hike. Here are a few:

Canadian housing market, the Canadian economy, and Canadian inflation

  • Strong continuous economic growth, exceeding projections and forecasts
  • Demand exceeding supply in many cases
  • Unemployment is low and household income is back at pre-pandemic levels
  • Inflation (of course) is growing at a record pace
  • Businesses are increasing prices to make up for lack of supply and inventory, and to account for increased production costs
  • The severity of the COVID-19 virus has subsided
  • Consumer activity and spending has increased since pandemic restrictions have eased
  • The recent "out-of-control" housing market activity is expected to stabilize
  • The war in Ukraine is causing concern on a global scale
  • Rising energy, food prices, supply chain shortages and increased global and domestic demand, the Consumer Price Index (CPI) inflation hit 5.7%, surpassing the BoC's forecasts
  • Expectations have CPI inflation reaching an average of roughly 6% over the next few month and remaining high for most of 2022

How is the war in Ukraine affecting our economy in Canada?

Due to numerous sanctions aimed at Russia, the destruction of the economy in Ukraine, and the unrest that this conflict is causing in various other parts of Europe and the world, both production and the ability to import many products from overseas has created an even greater imbalance between supply and demand in Canada and North America.

The ongoing war is acting as an impetus when it comes to the recovery of many global economies from the COVID-19 pandemic since many European countries are experiencing additional challenges with supply as a result of the war.

What's in-store for the Canadian economy in 2022?

With immigration expected to grow, along with heightened activity in the labour markets, the BoC expects that our economy will grow by 4.25% in 2022 due to the expanded capacity of production capabilities, and then reducing its growth rate to 3.25% in 2023 with a further slowdown in growth at 2.25% in 2024 as a result of higher interest rates.

Will interest rates keep rising?

With demand continuing to exceed supply and while inflation continues to remain significantly higher than the Bank's target rate of inflation of 2%, there is no doubt in my mind that interest rates will keep rising over the next year or two. We can expect it to rise quite aggressively over the next few rate calls unless a significant drop in inflation occurs soon.

As the economy adjusts to the newly increased interest rate, the Bank of Canada will be keeping a close eye on the economy in order to determine what steps to take on the next policy announcement that is currently scheduled for June 1, 2022.

When should I get my mortgage application started?

If you are thinking of purchasing a home or commercial property, or are considering refinancing or renewing your existing mortgage, reach out to us at Clover Mortgage today to secure your mortgage rate before it goes up again. Speak with a licensed and knowledgeable mortgage broker today by calling 416-674-6222 or email us at info@clovermortgage.ca.

Steven Tulman
Written By Steven Tulman
“Making the process of getting a mortgage an easy and enjoyable experience for every Clover Mortgage client!”