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Bank of Canada hikes target rate to 4.75% in June announcement

And just like that, rates are on the rise again.

The Bank of Canada opted to increase its trend-setting Overnight Lending Rate in its policy announcement today, heaping another 0.25% onto the cost of borrowing, and bringing the benchmark to 4.75%. It is the ninth rate increase the central bank has made since March 2022, and officially brings the rate 450 basis points above where it sat during the lows of the pandemic.

As a result, the Prime rate – which lenders use to set their variable borrowing products, including variable-rate mortgages – will increase to 6.95%. Variable mortgage rates – the lowest of which is currently 5.55% – will be soon to follow as lenders factor these rising funding costs into their bottom line.

Today’s hike brings an end to the short-lived hold stance the Bank had taken since March. Monetary policymakers had made it crystal clear that such a hold was conditional on economic data falling in line with expectations – and that hasn’t been the case, following stronger-than-expected GDP and inflation readings.

“Key measures including consumer spending, core inflation and a tight labour market are not cooling in line with the Bank’s forecast when they conditionally paused rate hikes earlier this year,” said James Laird, Co-CEO of and President of CanWise mortgage lender. 

“Going forward, the Bank has reemphasized its commitment to getting core inflation back to the two per cent target and will raise rates further if key measures suggest they should do so. A further 25 basis point rate hike is certainly on the table at the next announcement in July.”

Speculation of another hike sparked when Statistics Canada reported the Canadian economy grew by 3.1% in the first quarter of 2023 – well outstripping the Bank’s forecast of 2.3% – while inflation ticked up to 4.4% in March, the first increase after 10 consecutive months of declines.

This growth is the opposite of what the Bank – which has been struggling to tamp inflation back down to its 2% target over the last year – wants to see. 

“Globally, consumer price inflation is coming down, largely reflecting lower energy prices compared to a year ago, but underlying inflation remains stubbornly high,” writes the Bank in its announcement. “While economic growth around the world is softening in the face of higher interest rates, major central banks are signalling that interest rates may have to rise further to restore price stability.”

The Bank adds that it continues to expect CPI inflation to slow to around 3% within the coming months, as lower energy prices ease price growth. However, given the “core” inflation measure – which strips out the volatile gas and food categories – has hovered in the 3.5 - 4% range for several months, “concerns have increased that CPI inflation could get stuck materially above the 2% target.”

“Based on the accumulation of evidence, Governing Council decided to increase the policy interest rate, reflecting our view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target,” writes the Bank.

“Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the inflation target. The Bank remains resolute in its commitment to restoring price stability for Canadians.”

Analysts called for 50/50 chance of hike

Economists had been largely split on what direction the Bank would take today; as of last week, markets were pricing in a 40% chance of a hike, up from 28% before the GDP numbers were released. 

Scotiabank’s Vice President and Head of Capital Markets Economics Derek Holt had been among those calling for a hike today, saying GDP data was just too robust to be ignored.

“GDP data is the latest in a string of evidence supporting my long held view that the BoC quit its hiking cycle prematurely in January and needs to return with further tightening now,” he wrote in a May 31st analysis note.

“GDP growth is outpacing the BoC’s April MPR projections which indicates that the economy is in a deeper state of excess demand than they had judged at the time.”

What does this mean for mortgage borrowers?

Those currently in a variable-rate mortgage with variable payments will see the effects of today’s rate hike immediately, as lenders will be quick to build the increase into their pricing. This will also impact those with other forms of floating-rate debt, such as HELOCs and auto loans.

“Those with a variable-rate mortgage and home equity line of credit (HELOC) who are already fatigued by rate hikes, will see their interest rate increase further,” says Laird. “Those who have fixed payments with their variable-rate mortgage will likely exceed their trigger rate if they have not already done so. Those with variable payments will see their payments increase to absorb this rate hike.” 

Bond yields, which were already hovering near highs not seen since the financial crisis, spiked higher on the Bank’s news, reaching the 3.7% range. This will put further upward pressure on fixed mortgage rates, as lenders refer to the bond market when pricing their fixed-borrowing products.

“Fixed rates had already started to increase in anticipation of a possible rate hike and will increase further now that we know the Bank has hiked rates. Bond yields, which are the key input to fixed-rate mortgages, are at their highest point since 2007,” Laird adds.

How much will my mortgage payment rise?

Since the Bank of Canada kicked off its hiking cycle in January 2022, variable borrowers have seen their payments soar by 62%, totalling $1,614 per month, and $19,368 per year.

Today’s 0.25% increase will add another $98 per month, or $1,1176 per year, according to's mortgage payment calculator. This is based on a homeowner who put a 10% down payment on a $716,083* home with a 5-year variable rate of 5.55% amortized over 25 years (total mortgage amount of: $664,453) has a monthly mortgage payment of $4,075.

How will today’s rate hike impact the housing market?

The strength of Canada’s real estate market has surprised analysts in recent months, with sales and prices recovering significantly through the spring months; activity jumped nearly 25% in the GTA region and were up 16% in Vancouver in May. Home prices are also on the rise in Canada’s largest cities, with the average Toronto home price coming in at $1,196,101, and $1,188,000 in Vancouver.

While the latest data from the real estate boards suggests buyers have largely absorbed today’s higher interest rate environment, today’s hike could put a damper on this warm-weather growth, says Laird.

“This rate hike will put downward pressure on home prices, which have rebounded faster than the Bank had expected,” he says.

The bottom line

Whether you're an existing mortgage holder, are coming up for renewal, or are an aspiring first-time home buyer, today’s rate hike means it’ll become even more expensive to get a mortgage. When markets are volatile, it’s a great time to connect with a mortgage broker to discuss your options, and to look into getting a rate hold if you’re currently rate shopping.

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