Key points from the April 2022 Bank of Canada announcement:
- The Bank of Canada announced a +0.50 increase to the prime rate. This is the largest increase since May 2000.
- Geopolitics and ongoing COVID-19 spread have fueled the highest inflation we’ve seen since the nineties.
- BoC gives clear indication that it will continue to increase policy rates until inflation subsides to target levels.
The Bank of Canada announces a +0.50% increase to the policy rate.
The Bank of Canada has delivered on expectations that it would increase the overnight lending rate by +0.50%. The new overnight lending rate is now sitting at 1.00%. The retail bank prime rate will increase from 2.70% to 3.20%.
For the past 6 months, inflation has dominated the headlines for the global economy and the BoC is taking the necessary steps to reel it in.
Today’s announcement of a 50bps increase to the policy rate is the largest single meeting increase since May 2000, and a clear sign that the BoC is taking the inflationary pressures seriously. During previous meetings the BoC was hesitant to act too quickly, expecting inflation would settle back down naturally as bottlenecks due to COVID-19 resolved themselves. However, the conflict in Ukraine has added an even greater stress and clouded the future outlook that just can’t be ignored.
My take on what’s to come…
We should expect further increases in the months to come. The extraordinary geopolitical tensions and ongoing pandemic will call for extraordinary actions by central bankers around the globe to ensure that inflation doesn’t get too far out of hand.
The key question remains: By how much will the prime rate increase in the coming months?
Bond markets have priced in an additional 1.50% increase after today’s move over the next 24 months. That could take the retail bank prime rate from 3.20% today to 4.70%.
While it remains a possibility, I don’t know that we will see such an increase from the BoC. Canadian households are ladened with historic amounts of debt. That means that changes to the prime rate will be amplified much more dramatically and household spending will change. We are already seeing definite signs of this… real estate activity has cooled, lumber prices are (finally) falling due to a decrease in demand from DIY home renos and fuel consumption is down at the gas pumps.
Also, look out for whispers of a recession. It’s certainly too soon to talk recession today, but market sentiment is shifting negative and bracing for the possibility of a recession within the next 2 years. This would put downward pressure on interest rates.
What does this mean for mortgage rates?
The retail bank prime rate used to calculate mortgages and lines of credit will increase from 2.70% to 3.20%.
You can expect an increase of ~$24.00/mth per $100,000 of mortgage debt that you carry. For example, if you carry $500,000 this will translate into roughly a $120/mth increase.
Should you be locking in?
While it would be easy to abandon ship in the face of such pessimistic news and opt for a fixed rate, I still don’t believe it is a good time to lock in.
Current 5 year fixed rate mortgages are straddling 4.00% at the banks – a helluva premium to pay for the stability of a fixed rate.
Given the VERY uncertain outlook for the global economy and the specter of a recession within the medium term, I believe holding on to a variable and patiently riding the wave up and down will save money in interest payments over the long term.
The door is always open
If you’d like to discuss today’s decision and how it relates to your mortgage, feel free to schedule a convenient call time directly into my calendar below.