October 2022 Bank of Canada Interest Rate Update

October 26, 2022

Key points from the October 2022 Bank of Canada announcement:

  • The Bank of Canada surprised markets today by announcing a lower than expected increase to the policy rate of +0.50%.
  • Since the beginning of 2022 the BoC has executed the following increases: +0.25% (March), +0.50% (April), +0.50% (June), +1.00% (July), +0.75% (September), +0.50% (October).
  • After today’s increase, the retail prime rate will jump from 5.45% to 5.95%.
  • Full press release can be read here.

Don’t feel like watching? Find the full transcript below!

Chris: [00:00:00] This morning, the Bank of Canada surprised markets by announcing only a half percent increase to the overnight lending rate, as opposed to the three quarter percent that was widely expected by economists. So that’s some sugar coating of good, good news and bad news mixed all in one. There is an increase, but it isn’t as high as we anticipated, which is a little bit of a relief. So what does that do? It brings the retail prime rate from 5.45%, which it currently is, up to 5.95%.

The end of the rate hike cycle is in sight

Chris: [00:00:41] Today’s increase is yet another bitter, awful tasting dose of medicine to attempt to cure this current bout of inflation. And I’m afraid there’s no, no sugar coating of this one. It’s going to hurt. Today’s move represents a push into what the bank calls restrictive territory. And restrictive territory is an academic idea that the increase to the interest rate will now really start to hammer down and restrict economic activity, which will decrease demand, which ultimately should move to push inflation down. The good news is that economists and markets widely expect that the rate hike cycle is coming to an end. The next meeting in December should represent the last increase. We don’t know yet what magnitude of increase it will be, but the expectation of markets right now is that we’ve reached the peak and the rate hikes will stop in 2023. So if there’s a silver lining today, that’s what you can take away.

Chris: [00:01:56] Beyond December, what will happen? Well, it really depends on how the forces at play impact the Canadian and global economy. You have two things happening here. On the one side, we have the expectation of recession. Almost all business leaders and economists expect 2023 to be a year of recession in Canada and globally. And then you have this impact of the rising interest rates and creating a deflationary environment. The problem with inflation and this is a big criticism of the Bank of Canada, is that inflation is a lagging indicator. The inflation that we have today that’s being reported is a result of business activity and forces that were at play 3 to 6 months ago. So they’re currently trying to give us medicine for a problem or an infirmity. The cause was six months ago and traditionally the Bank of Canada and central bankers around the world tend to overdo it when tightening interest rates. And so the expectation here is that the Bank of Canada is overdoing it and we will see inflation drop rapidly. So the combination of recession plus deflation means one thing, that is the environment for lower interest rates. How much lower? At this point, we don’t know because it depends on the severity of of those factors. But we do know that 2023 towards the latter half and into 2024, we will see rates start to drop and relief hallelujah, finally on the horizon.

Staying with your variable rate may be the best bet

Chris: [00:03:40] The question now becomes what to do about your variable rate mortgage before then? Can you sit and wait and endure the high interest rates? That is the difficult question. Now, if you are struggling to stay afloat, if the most recent increase is pushing you to the brink, reach out. Let’s have a conversation and see what alternatives there are to support you. But if you are able begrudgingly to maintain your payments, then staying in a variable rate mortgage is recommended. Because if you lock into a fixed, you’re locking into a 20 year high watermark for fixed rate mortgages. And eventually, we do know, as history has shown in the past, that interest rates will come down after this rate hike cycle and probably quite aggressively. So if you’re locked into a five year fix, you have to keep in mind that the penalty to exit that mortgage is based on the interest rate differential, which becomes very restrictive and cost prohibitive. So you’ll be forced to stay in a very high fixed rate mortgage while the market is lower. So if you can stay in that variable rate mortgage, adjust your spending at home, tighten the belt, ride the wave, and we’ll see what the next few months bring. The next Bank of Canada meeting will be in December. Until then, reach out. My name is Chris Molder. Bye for now.

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.


Christopher Molder

Mortgage Broker

Christopher is a mortgage broker based in Toronto, Canada. And a son of a broker too. He’s a second generation mortgage broker. Following in his father’s steps he joined the family mortgage business straight out of university.