Bank of Canada Increases Overnight Rate to 1.50%
By now you’ve certainly heard about the Bank of Canada’s rate increase July 11th. I wish I could say I was the first one to break that news to you, but in today’s day and age news travels REALLY fast. I thought I would provide a little more insight into the rate increase yesterday and I hope you find it helpful.
The Bank of Canada increased its overnight lending rate yesterday by 0.25%. The change did not come as a shock as there was much speculation leading up to the meeting yesterday that the Bank would increase rates. This marks the second rate increase by the Bank this year, and the fourth rate increase since last July. It also marks the highest we have seen the overnight lending rate since 2008.
Bank of Canada Governor Stephen Poloz noted that the Canadian economy continues to operate close to capacity. He expects that further rate increases will be warranted in the future to keep inflation near its target of 2%, but did not comment on the timing of those increases. In particular, Poloz mentioned that the Bank will continue to monitor the housing market, as well as trade policies when deciding on future rate hikes.
While the Bank has explained it expects to make more rate hikes in the future, there is certainly lots up in the air at the moment. Trade tensions between the US and China are escalating, and the possibility of more tariffs assigned to Canadian imports entering the US creates lots of uncertainty. It’s also uncertain how the housing market and consumer spending will respond to recent rate increases. We still have likely not seen the full impact of previous rate increases, and the latest increase could have consumers tightening their budgets even further. While more rate increases in the future may be coming, I expect the Bank of Canada may want to take a breather for a while and see how some of these factors transpire before making any further changes.
The Rate Increase Impact
All major banks increased their Prime Rate by 0.25% yesterday. The increase in prime rate means variable rate mortgages, loans, and lines of credit will also increase by 0.25%.
In real numbers, a 0.25% increase in rate on a mortgage will increase monthly cost by roughly $13 for every $100,000 in mortgage balance (on a 25 year amortization). Below is a chart to show you the change in payment on various mortgage amounts: