Key points from the July 2022 Bank of Canada announcement:
- With higher than expected inflation persisting, the Bank of Canada announced a 1.00% increase to the policy rate. This is the highest jump since 1998.
- So far in 2022, the BoC has executed the following increases: +0.25%(March), +0.50% (April), +0.50% (June), +1.00% (July)
- The BoC talks tough in their press release, setting expectations of more increases if inflation doesn’t drop.
The Bank of Canada announces a +1.00% increase to the policy rate.
Following June’s 0.50% increase, the Bank of Canada is taking a tough stand on inflation and increased the overnight lending rate by +1.00%.
The new overnight lending rate is now sitting at 2.50%. The retail bank prime rate will increase from 3.70% to 4.70%.
What the Bank of Canada has said:
“With the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates by raising the policy rate by 100 basis points today. The Governing Council continues to judge that interest rates will need to rise further, and the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation.”
My take on what’s to come…
Despite today’s aggressive increase of the prime rate, I believe that we are approaching an inflection point of the current rate hike cycle. There are contradicting forces acting on the market at the moment – external inflationary pressures vs internal recessionary pressures.
Fixed rate mortgages are priced on the bond yield and for the first time in 2022, we are seeing bond yields drop on global recession fears. So far, they are down ~0.50% from the peak in June.
Variable rate mortgages float based on the policy rate set by the Bank of Canada. The BoC is increasing rates today, responding to immediate high inflation. If inflation doesn’t subside by the next meeting, there remains the possibility of ongoing increases to the prime rate. This is a blunt instrument which will ultimately send us into recession.
Don’t panic over persistent rising rates.
Over the past 30 years, the Bank of Canada has gone through 6 rate hike cycles. You know what they all had in common? A period of steep declining rates shortly thereafter.
What does this mean for mortgage rates?
Look out for falling fixed rate mortgages as we head into the later half of 2022. Currently fixed rates are well over 5.00%, but this week a few non-bank lenders have quietly started dropping their fixed rate mortgages. This is a trend we are already seeing in the US.
Variable rate mortgages will have to endure a little bit longer. It’s not a question of “if” they will come back down, but rather “when.” Step 1 is for reports of declining inflation. Step 2 will be a sluggish Canadian/global economy in recession. I think this is a story for 2023.
The door is always open
No doubt today’s announcement of increasing rates will cause some stress and preoccupation if you’re in a variable rate mortgage. Short term, you may have to make some adjustments to your household expenditures. If you don’t have a budget tracker, I highly recommend Mint to capture household income vs expenses to manage your cash flow.
If you’d like to discuss today’s decision and how it relates to your mortgage, you can schedule a convenient call time directly into my calendar below.