Bank of Canada’s First Big Hike in Decades

Just this month, the Bank of Canada had its first 50-basis point hike in interest rates in the past 22 years. The move was expected by many bank watchers and economists who were anticipating the increase. Now, there is a lot of uncertainty as to what is coming next. 

The move is seen as a very aggressive one. There was also the announcement of a quantitative reduction of the number of government bonds held on the bank’s balance sheet. This will come into effect on the 25th of April. There is acknowledgement of the need to move forcefully to combat the increasing prices, as well as the return rates.

Exact Change is Made by the Bank of Canada 

The hike comes in after inflation in February hit 5.75%, as seen in the consumer price index readings. The bank raised the overnight rate to 1% and increased the GDP growth projections to 4.2% for this year. Inflation expectations were bumped to 5.3 per cent, moving from the 4.2 percent average.  

The revisions are not surprising, especially with the estimates that were released in January. The Bank of Canada is still optimistic for more growth in 2023, but not everyone is as optimistic as they are. Some analysts expect to see further tightening into 2023. However, we don’t think the Bank of Canada will attempt to keep up with the U.S Federal Reserve. 

It is thought that it is housing vulnerabilities that would keep the bank’s hands tied so it can’t take the rate much higher. The opposite is true of the U.S Federal Reserve. They are expected to peak at 3.38%. Housing is of course overvalued currently, and so household debt burdens are higher and more rate sensitive for investment accounts. It is these that have the biggest share of the economy. 

What Does this Mean for Residents?

Persons with housing and mortgage debt may be under a bit of pressure in the coming months. Canadians with HELOCs and variable rate mortgages will feel the impact right away. With each rate hike, homeowners will continue to feel the hit. Look out for lender rates increasing in the coming days, and try to budget for even more rate increases through the rest of the year. The Central Bank updated its estimates for neutral interest rates running from 1.75% – 2.75%. 

BMO responded to the bank’s actions by indicating a raise in interest rates forecast by the 25 basis points for the year. It is now expecting 50 point hikes in June and July. 

The Bottom Line 

We do expect rates to go up for the rest of the year, but we are not sure just how much just yet. This will mean a sort of roller coaster experience for would-be homeowners and current homeowners. Therefore, homeowners who have the chance to switch to a fixed rate now should possibly take advantage of that and make the move to switch now.