March 2022 Bank of Canada Interest Rate Update

March 2, 2022

Key points from the March 2022 Bank of Canada announcement:

  • The Bank of Canada has announced a +0.25 increase to the policy rate.
  • BoC notes heightened uncertainty due to events in Ukraine, which will cause added pressure on inflation.
  • Domestically, Canada is looking stronger than anticipated as it emerges from the pandemic. Strong growth and employment metrics were noted by the central bank. 

The Bank of Canada has announced it will increase the prime rate by 0.25%.

This morning’s increase announcement should not surprise anyone. The Bank of Canada has projected for some time now that they will begin a series of rate increases to attempt to curb historic inflation levels. 

Of particular interest in today’s announcement, the Bank of Canada is forecasting even higher than anticipated inflation in the short term. This is being caused by a spike in oil prices due to the conflict in Ukraine, and a rise in food costs due to a poor harvest and increased transport costs. 

You can read the full press release here.

My take on what’s to come…

The road ahead is still very uncertain. Markets have been pricing 6 quarter point increases or +1.50% increase to the policy rate over the next 18 months. However, there are many factors that make such a scenario unlikely. 

Here are 3 quick reasons why I believe the BoC will be cautious and more modest in their rate tightening policies:

  1. Canadians are carrying near record levels of debt. Changes to the prime rate will be amplified by debt-laden households and businesses. The effect of increases should have a strong impact on spending.
  2. Record inflation is a global phenomenon widely blamed on the pandemic exposing weak supply chains. No amount of tightening by the BoC will address the underlying issues causing inflation. It won’t stop a war in Ukraine or improve the harvest.
  3. Global uncertainty. Geopolitics and the pandemic will weigh heavily and there is risk of further headwind. If the BoC is too aggressive with its rate policy, it could risk pushing the Canadian economy into a recession.  

With this in mind, we are forecasting a more modest increase of +0.75% to 1.00% to the prime rate over the next 12 to 18  months arriving at ~3.45%.

What does this mean for mortgage rates?

If you are currently in a variable rate mortgage, you can expect your lender to communicate with you regarding an increase to your rate and payment. 

You can expect an increase of ~$11.00/mth per $100,000 of mortgage debt that you carry. For example, if you carry $500,000 this will translate into roughly a $55/mth increase.

Should you be locking in?

Short answer is “NO” for most borrowers. Locking into a fixed would see a significant jump in interest costs for most borrowers. The average 5 year fixed rate is currently 3.24% across the banks. 

For more information about “should you lock into a fixed rate” check out my recent blog post on the topic here.

Of course, the circumstances of each borrower are unique, so feel free to get in touch with me if you’d like further guidance. 

My view is that the pricing is too high and we could see fixed rates ease back down below their ~3.00% threshold.

The door is always open

If you’d like to discuss today’s decision and how it relates to your mortgage, please contact me here or schedule a convenient call time directly into my calendar below.