After weeks of will-they-won’t-they speculation, the Bank of Canada announced Wednesday morning it’s raising its overnight lending rate by a quarter of a percentage point to 1.25%.
“Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity,” the central bank said in a press release.
Sentiment among economists in mid-December pointed to the bank holding off on a rate hike until the spring, but turned on its heels at the end of a strong year that included oil price recovery, a booming housing market, and synchronized global expansion.
Canada’s unemployment rate fell to 5.7% in December — the lowest recorded level since 1976 — as 78,600 new jobs were added to the economy. The Bank of Canada’s latest business outlook survey, based on interviews with senior managers from about 100 Canadian firms, found broad-based growth across regions and sectors and positive investment intentions.
After a blistering 3% growth in 2017, the bank estimates real GDP growth will slow to 2.2% in 2018 and 1.6% in 2019. Strong employment growth bolstered consumption and residential investment, but these areas are expected to contribute less to growth going forward due to higher interest rates and stricter mortgage guidelines that kicked in Jan. 1. In turn, business investment and exports are expected to fill in that growth gap.
The rate increase was highly anticipated, with each of Canada’s Big Six banks hiking their mortgage rates ahead of Wednesday’s announcement. After years of ultra-low interest rates, the third increase in six months further tightens the screws on the mortgage market. The Bank of Canada raised its benchmark interest rate twice in 2017, first in July and again in September.
The impact of the increase can be seen using Ratehub.ca’s mortgage payment calculator: before the July announcement, a consumer with a total mortgage of $400,000 amortized over 25 years, with a 5-year variable rate of 2.50%, would have a monthly mortgage payment of $1,792. With Wednesday’s increase, the homeowner’s monthly mortgage payment increases by $153 a month to $1,945. That amounts to an additional $1,836 a year.
James Laird, Ratehub.ca co-founder and president of mortgage brokerage CanWise Financial, says consumers with fixed-rate mortgages are unaffected until their future renewals.
“Those with variable rate mortgages, HELOCs, and personal lines of credit can expect their interest rate to rise by a quarter point next month,” he says. “It’s this group that will feel the immediate impact of the rate hike.”
Laird says the bank’s language suggests a further rate hike in March is unlikely, but will be considered as 2018 unfolds.
“For anyone considering purchasing in the spring market, getting a pre-approval to hedge against any further interest rate increases is an excellent idea.”
As usual, the bank emphasized its data-driven approach to decision making and said it will be “cautious” about future policy changes. The bank has repeatedly cited high household debt levels and their sensitivity to interest rates, high housing prices, and uncertainty around renegotiating the North American Free Trade Agreement (NAFTA) as roadblocks to its economic outlook.
The Bank of Canada’s next interest rate announcement is scheduled for March 7.
Source: Bank of Canada