Key points from the January 2023 Bank of Canada announcement:
- The Bank of Canada announced a 0.25% increase to the prime rate for its first meeting of 2023.
- Markets have priced today’s increase as the last one for this interest rate hike cycle. The BoC introduced language to confirm that this should be the last increase – all things equal.
- In 2022 the BoC increased the policy rate +4.00% in an attempt to slow inflation. Today’s increase brings the overnight rate up to 4.50%
- The retail prime rate (what you and I pay) will increase to 6.70%
- Full press release can be read here.
The Bank of Canada starts the year with a +0.25% increase to the prime rate, but the expectation is that it will be the last.
New year, same trend – the Bank of Canada has announced an increase to the overnight lending rate, bringing it to 4.50%.
You can read the full press release here.
The road ahead.
There was some hope at the December 7th 2022 meeting that it would be the last increase but a VERY strong December jobs report + strong inflation reading for the month of November quickly evaporated any hope of a pause just before the holidays.
Today’s increase was signed, sealed, and delivered in December on the back of those reports.
The more recent December monthly inflation reading – released last week – clearly shows a break and downward trend to inflation. Jump for joy.
It’s for this reason that markets have bet that today’s increase will be the last one from the BoC – assuming no further disruptions or surprises we haven’t already accounted for.
PAUSE ≠ PIVOT
While it’s encouraging to finally know where the peak of the mountain is, don’t expect a swift descent back to lower rates from the Bank of Canada.
They will want to see a meaningful drop to the inflation rate coupled with an economic slowdown before they budge on lowering the prime rate.
Expect Q4 2023 into Q1 2024 before we see a change.
Fixed rates are front running the interest rate drop.
Fixed rate mortgages are priced relative to the bond market. Bonds are forward looking, trying to predict the future. The prediction is lower rates and we are seeing that already in the fixed rate mortgage market.
5 year fixed rates peaked at ~5.69% in October 2022. Today we are starting to see 5 year fixed rates priced between 4.69% and 5.09% for new business, depending on the insurability of the mortgage.
It’s reassuring to see this trend strengthen. I expect it to continue over the months to come. With each inflation reading trending down, we’ll see drops to the fixed rate.
Is now the time to convert variable to fixed?
As expressed in my December 2022 Rate Watch the answer to this question “depends”.
Variable rate borrowers stretched by the high prime rate will start to find monthly payment relief in fixed rate mortgages this year and can certainly consider a conversion to fixed to improve cashflow.
But conversion comes at a cost.
Keep in mind that if you convert to fixed, you forgo the opportunity to take advantage of future lower rates as they come down during your term.
I recommend scheduling a call with me if you’re interested in exploring these options.
If you’d like to discuss today’s decision and how it relates to your mortgage, you can contact me here or schedule a convenient call time directly into my calendar below.