Well, here we are again. Another supersized hike by the Bank of Canada (BOC) to the tune of 75 basis points (0.75%). While not unexpected, an option to add fries with that, perhaps a tequila is more appropriate (but it doesn’t work well with my reference, hehe), may help it go down a little easier.
Okay. Enough with the McDonald’s reference…it is not like we can just put this one on our credit card and pay it back whenever we feel like it. For now, we are just left with a bad taste.
This increase is going to hurt, I get it. More so than the previous four as this is the fifth and this hike may have been a little more than some consumers were expecting.
Let’s back up here for a minute. If you recall, back in 2021 the Bank of Canada said to consumers… don’t worry, we have your back. Interest Rates are going to remain low for longer with the suggestion that rates will not move until 2023. Inflation was transitory. Remember that? Well, that was short-lived.
Then the Bank of Canada came out earlier this year to provide more understanding and guidance with the suggestion that their ‘neutral rate’, the rate that no longer stokes or chokes economic growth, is somewhere between 2 – 3%. It was suggested that the Bank was targeting closer to 3% than 2%.
And today, after Wednesday’s hike, the BOC is now sitting at 3.25%…just outside of their earlier projection. But that is not it…the BOC went on to say, “Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further.”.
What now?
You may have heard the headline, Inflation slowed to 7.6% in July (down from 8.1 one month earlier). But this is not the inflation number the BOC is watching…they have their eye on Core Inflation. And it is Core Inflation that has continued to move up from 5% to 5.5% in July.
Long story short, consumers will be paying more.
For example…
Assuming a $300,000 mortgage at Prime minus .90% (2.45 – .90 = 1.55%)
Jan 2022 – $1,206.16
Sept 2022- $1,668.77
And if you had a Home Equity Line of Credit (HELOC) of $300,000 with interest only payments
Jan 2022 – $609.40
Sept 2022 – $1,347.28
Every increase has been unpleasant while in an Adjustable product, it could always be worse and I feel for those in HELOC’s today.
Where do we go from here?
In short, I don’t know! My crystal ball has been hazy at best for the past 9 months.
What I can say, is that CIBC has been vocal suggesting the BOC will now pause. Others are saying there may be another 25 – 50 basis point hike(s) before the year is out. From what I can gather, and I hope this is true, we are seemingly at or near the top.
My fear… a more pronounced recession in 2023 resulting from a BOC over correction (keep an eye on layoffs). I don’t know how Canada avoids a recession given the sheer number and magnitude of increases in just the past 9 months. A 3% increase is not a small and insignificant number. I will go on record and say this… the inflation target of 1 – 3% the BOC is hoping to achieve…ya, it isn’t happening any time soon. And certainly not under the careful watch of this Liberal Government. I’m not looking to get political here, just making a statement.
In closing…
Prime Rate is now sitting at 5.45% and March 2008 was the last time we experienced a Prime Rate at this level. The fear of the unknown has been heightened today as the squeeze is on every paycheck. For those who may be uncomfortable or feeling the squeeze, please do not hesitate to reach out.
You are not alone. Let’s chat.
P.S. but not a P.S…I almost forgot to mention. The Fixed Rate market…it has not moved. The bond market remained flat after Wednesday’s announcement, which is great and welcomed news.
Jeremy Nagel
Mortgage Broker
403.242.5547
There is life after your mortgage™
