Bank of Canada Raises the Key Lending Rate

The Bank of Canada has just raised its key lending rate by 50 basis points, bringing it to 1.00%. This marks the second change to the Bank of Canada’s overnight target rate this year and the first 50-bps rate hike since 2000.

In its statement the Bank of Canada said, “With the economy moving into excess demand and inflation persisting well above target, the Governing Council judges that interest rates will need to rise further.”

The Bank now expects CPI to average “almost 6% in the first half of 2022 and remain well above the control range throughout this year”.  It then expects easing to 2.5% in the second half of 2023 and returning to the 2% target in 2024.

What happens now?

In the coming days, banks and other financial institutions are expected to follow the Bank of Canada’s lead and hike their prime lending rate – or Prime rate. Prime is used to price variable rate mortgages and personal and home equity lines of credit (HELOC). We expect the banks to pass on the full extent of the increase moving Prime up to 3.20%.

Once Prime rises, existing variable-rate borrowers will see their rates increase. This may result in a slightly higher monthly payment. For variable rate borrowers with fixed payments, more of their payment will go towards interest cost while less will go towards principal repayment. This is an increase of approximately $26 per $100,000 of mortgage.

If you have a fixed-rate mortgage, you will see no change to your rates.

According to ATB’s economist, ” There is a good chance the policy interest rate will rise to 2.0% or even higher before the end of 2022″, referring to the Bank of Canada’s overnight rate.

“Raising interest rates is a tricky business because the cure for elevated inflation is the economic drag created by higher borrowing costs. With this in mind, the Bank argues that the national economy is strong enough to absorb the rate hike.”

Click here to read the full announcement from the Bank of Canada. The Bank of Canada schedules eight interest rate announcement dates per year. The next announcement is scheduled for June 1, 2022.

If you have questions about the impact rising rates may have on your financial situation, give me a call so we can discuss your options.