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In addition to raising interest rates by another 75 basis points on September 7, the Bank of Canada also signalled that it’s not done hiking just yet.
As expected, the Bank raised its overnight target rate to 3.25% on Wednesday, September 7. That’s now 300 bps above its low of 0.25% at the start of the year.
Soon after, the country’s big banks announced equivalent increases to their respective prime rates, landing at 5.45% with most banks1, which will raise the borrowing cost for variable-rate mortgage holders and those with personal lines of credit and home equity lines of credit (HELOCs).
In its statement, the Bank indicated that it remains concerned about the current high levels of inflation.
It noted that "short-term inflation expectations remain high,” and that the longer this continues, "the greater the risk that elevated inflation becomes entrenched.”
As such, the Bank said, "the policy interest rate will need to rise further.”
How much higher might rates rise?
Prior to Wednesday’s rate decision, official forecasts from at least three of the big banks had the overnight rate reaching its peak at 3.25%. But those forecasts are now being revised.
"We’ll…be lifting our target for the end of this tightening cycle, with another 25-50 bps on tap for October,” noted CIBC’s Avery Shenfeld. "Even in October, the Bank is likely to want to leave the door open for a further move until it gets more definitive evidence of a deceleration in growth and inflationary pressures.”
But Shenfeld also said the Bank needs to be cognizant of the lag it takes for rate hikes to flow through to impact the economy and inflation.
"A front-end loaded strategy for rate hikes is designed to take rates up quickly, but also behooves the central bank to pause at some point to see how the economy is coping, given that there is a lag in seeing that response in growth, and an even longer lag for its impacts on inflation,” he wrote.
The impact on mortgage carrying costs
The latest rate hike is estimated to add approximately $43 in additional monthly interest cost per $100,000 in mortgage debt, based on a 25-year amortization.
It will also push more fixed-payment variable-rate mortgages past their "trigger rate,” which is the point where monthly payments are going entirely towards interest costs.
Depending on the lender, those borrowers may see their amortization extended, until renewal time when their payments will increase to get them back on their original amortization schedule. For others, lenders will be reaching out to borrowers to encourage borrowers to increase their monthly payments.
For any variable-rate borrowers concerned about rising monthly mortgage payments, contact me so we can go over your options.
1 TD Bank has two prime rates, TD Prime is at 5.45% and TD Mortgage Prime is at 5.60% due to an additional 15-bps hike the bank made in 2016 independent of a Bank of Canada rate move.
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