Hello everyone, I’m currently coming from Italy as I am on vacation, but I wanted to make a quick blog regarding the Bank of Canada’s announcement. The Bank of Canada announced that their overnight rate would increase by 0.75%, bringing it to 3.25%. When the Bank of Canada increases or decreases the rate at which they lend funds to the banks, it means that in turn, the bank will adjust the rates that they charge to you, the consumer.
For variable rate products, pricing from banks is based on the prime rate. Prime was at 4.70%, and with today’s increase, it will now be 5.45%. If you hold a variable rate product, you likely have a discount off of prime, so please remember that your payment is based on prime minus your discount. For example, if you have a discount of 0.9%, your new rate will be 4.55%.
The Bank of Canada has released a statement saying:
“The global and Canadian economies are evolving broadly in line with the Bank’s July projection. The effects of COVID-19 outbreaks, ongoing supply disruptions, and the war in Ukraine continue to dampen growth and boost prices.”
It seems as month after month, we are hearing the same things about inflation, supply and demand issues, and global economic stressors putting upward pressure on the CPI. I can see how this can be frustrating as a consumer, especially with these rate increases not leading to impacts on inflation to date. Unfortunately, the Bank of Canada doesn’t have much control over global issues so they are doing what they can domestically with the overnight rate and quantitative belt-tightening. Many argue that if our elevated inflation rate is caused mainly by supply issues, why increase rates that impact demand? Inflation is caused by supply and demand, and when the demand in the economy is high, and supply is low, prices increase. Alternatively, when supply is high and demand is low, prices drop. So these rate increases help to decrease the demand in the economy, as affordability continues to decrease for many people.
To look on the brighter side, we have already seen the CPI drop last month from 8.1% – 7.6%. The next CPI inflation rate for the month of August will be released on September 20th, so it will be interesting to see if the drop in the CPI trend continues. The target range for inflation is 1%-3%, so a slight decrease is a good sign, but there is still a long way to go.
The next Bank of Canada meeting is on October 26th. My prediction is that this is going to be the last rate hike of the year, but I wouldn’t expect them to start decreasing rates just yet.
In my opinion, variable-rate mortgages are still a better option than their fixed counterparts. While yes, this most rate increase has closed the gap between current fixed rates and variable rates, if you lock into a fixed-rate mortgage right now, your mortgage payment will be the same, if not more, plus you’ll be tying your hands with large penalties that come with fixed mortgages down the road. My advice would be to still wait it out with your variable rate mortgage, and see how the economy and inflation react to this most recent rate increase before making any more permanent changes to your current mortgage.
I hope this helped answer some of your questions and calm your nerves. If you have any questions you can reach my office at 519-250-4848, email me at Rasha@shopmortgages.ca, or fill out the contact form below.
Signing off from Italy, I hope you all have a great day!