Your variable rate mortgage, line of credit and/or student loans are all based on the Prime Rate. This is your personal update from Mortgage Broker Claire Drage and our team at The Windrose Group on the latest Bank of Canada announcement.
As of 10:00 AM EST on June 7, 2023:
Bank of Canada Raised the Overnight Rate by 25 bps to 4.75%
The Bank carries out monetary policy by influencing short-term interest rates to stimulate or slow the economy down. It does this by adjusting the target for the overnight rate on eight fixed dates each year. As of 10:00 AM on June 7, 2023, the Bank of Canada (BoC) has raised the Overnight Rate by 25 bps to 4.75%.
The BoC gradually increased its benchmark rate from 0.5% to 4.5% over the past year with a series of interest rate hikes aiming to curb the surge in inflation after aggressively raising rates starting in March 2022 to clamp down on rapidly rising prices and hit a 39-year high of 8.1% in June 2022. Globally, consumer price inflation is coming down, which can be seen in lower energy prices compared to a year ago, but underlying inflation remains stubbornly high. A 25 bps raise doesn’t make a huge difference in anybody’s pockets, but it helps solidify the Bank of Canada’s message, being first and foremost an inflation-targeting central bank. BoC continues to cite inflation as the core reason for its decisions.
So far, the first announcement in January 2023 resulted in a 0.25 bps rate hike, resulting in a rate of 4.5%. In March, the BoC became the first major central bank to stop its aggressive hiking cycle and is currently on a conditional pause and still expects the higher interest rates will bring CPI inflation down in 2023. Inflation is not cooling fast enough, so the BoC has made the decision to hike rates another 25 bps to 4.75%.
While the BoC did not predict another rate increase this year, it has always maintained that they will continue to step in in order to curb inflation. The tide has be shifting and recently, there’s been a solid case for further rate hikes to be made. Statistics Canada’s report on May 16 revealed a stronger-than-expected result for the April consumer price index (CPI). The April CPI was 4.4% compared to the previous year, and surpassed economists’ expectations of 4.1%, and March’s CPI of 4.3%. This is also considerably higher than the 3% level the BoC is expecting to be reached by mid-2023.
Another rate hike in July isn’t necessarily out of the question anymore. So far, the economy consumer sector has been relatively resilient amid high interest rates. The labour market has shown strength, with the economy continuing to add jobs even as recession talk bubbles. Taking current market conditions into account, an additional 25-basis-point rate hike by the Bank of Canada might be needed so the central bank can reassure Canadians that it can reliably fulfill its mandate. Household vulnerabilities, including high consumer debt, are likely to limit the extent of tightening. Caution and further evaluation of economic indicators before making a definitive decision.
The slight upward movement in the latest Canadian inflation numbers is an indication that the road to the central bank’s 2% target will be a “bumpy” one and a non-linear descent in inflation. While Aprils CPI is a departure from the figures of recent months, it doesn’t unduly complicate the overall outlook, one-month of data doesn’t make a trend. The news should be taken in the wider context of the inflation rate’s overall decline since hitting a 39-year high in the middle of last year and has continued to come down.
The Bank of Canada stands ready to intervene should the financial system become strained and require additional liquidity. The economy remains resilient, with Canadians grappling with escalated interest rates and continued price pressures. However, in the long run, our banks are pretty safe. Canada has experienced limited spillover effects from global banking stresses thanks to its generally sound risk management and regulatory practices. In fact, Canada hasn’t had a Banking Crisis in 123 years.
What Accounted For April’s Rise In Inflation?
April’s inflation upswing was driven by multiple factors, with each of the Bank of Canada’s preferred core measures seeing an increase. This result is largely spurred by a huge annual spike in mortgage interest costs. Those were up 28.5% over the same time last year, StatCan revealed, while surging rent prices (up by 6.1%) also helped push inflation higher.
- Gasoline prices fell 7.7% year over year – although they were 6.3% higher than the previous month, the most significant monthly jump since last October.
- Grocery prices growth slowed, rising by 9.1% annually, although that growth was milder than the 9.7% figure seen in March 2022.
- Spring 2023 increasingly looks like the turnaround point for Canada’s housing market after a year-long slump, and labour markets remained firm in April.
Resilience of the housing sector is a key factor contributing to risk. Canadian home sales surged by 11% in April, accompanied by price increases and a swing in market balance favouring sellers. This renewed strength in the housing market indicates that monetary conditions may not be sufficiently tight. Economists are now weighing the resilience of the housing sector and stubborn consumer prices against other data that suggest financial stress among households and a slowdown in consumer spending.
Canada’s Mortgage Market
Mortgage interest costs surged, rising by 28.5% on a yearly basis, while rent posted a 6.1% year-over-year spike. There is a particular focus on the vulnerability of mortgage holders who will face higher interest rates.
Simulations based on projected rate hikes revealed that approximately 47% of mortgages will undergo an upward payment adjustment by the end of 2023 compared to February 2020. The adjustment process will continue until the end of 2026 when all mortgages will have been reset to presumably higher interest rates.
A small portion of the mortgage market with adjustable-payment variable-rate mortgages has already experienced real-time payment resets. Those with fixed-payment variable-rate mortgages are now amortizing over longer periods, potentially interest-only. The majority of mortgage holders, however, will not see payment resets until 2025 and 2026, resulting in a payment increase of approximately 40% based on the current expected path of interest rates. Moreover, resetting past fixed-rate mortgages will gradually lead to payments that are 10% to 25% higher over the next few years.
These characteristics of the Canadian mortgage market have played a crucial role in mitigating early damage from the tightening cycle, preventing immediate payment shocks and forced selling in the housing market. It also granted households and the economy time to adjust to higher rates. By 2025 and 2026, various factors, including potential interest rate decreases and years of income growth, could help temper the surge in debt service ratios.
Canada’s Potentially Looming Debt-Crisis
Canada’s household debt levels have rocketed to the highest among the G7 nations – a situation that, in the event of a global downturn, could have big consequences, according to Canada Mortgage and Housing Corporation’s (CMHC’s) deputy chief economist.
Interest rates have spiked over the past 14 months as the Bank of Canada embarked on an aggressive series of hikes aiming to curb rampant inflation. That’s altered the landscape significantly for scores of borrowers on variable rates, while the fact that rates are no longer as low as during the pandemic means many fixed-rate borrowers could face some pain upon renewing down the line.
Canada’s overall household debt is now exceeding the size of the economy after rising precipitously over the past decade and a half, with mortgages accounting for around three-quarters of this. Solving the nation’s mounting housing affordability crisis will be a key component of improving the outlook. However, because our housing market remains unaffordable, and we don’t have enough housing being built, time and pace of potential resolutions are a big concern.
If you feel you are unsure what to do next, or would like a pro bono review of your financial assets and liabilities, reach out and let’s chat – with over 60 years of combined mortgage broker experience, we’re informed and here to help you!