Bank of Canada Raises Key Interest Rate To 1%

Jane Switzer
by Jane Switzer September 6, 2017 / No Comments

The Bank of Canada is forging ahead on tightening monetary stimulus, announcing Wednesday morning it’s raising its benchmark lending rate by a quarter of a percentage point from 0.75% to 1%. This is the second time since July that Canada’s central bank has raised its key interest rate amid what it calls a “more broadly-based and self-sustaining” economy.

“Consumer spending remains robust, underpinned by continued solid employment and income growth,” the bank said in a press release. “There has also been more widespread strength in business investment and in exports.”

The central bank’s dovish tone on the economy had analysts predicting a second rate hike before the end of the year, but most expected Bank of Canada governor Stephen Poloz to wait until October. In a survey by Bloomberg News, only five out of 26 economists expected the central bank to hike its key interest rate this week.

Inflation remains below the bank’s 2% target, though there was a “slight increase” in core measures of inflation as price shocks dissipate the economy absorbed excess slack. As wage and price pressures remain subdued, the bank says there is still “some excess capacity in Canada’s labour market.” Despite acknowledging the global economy has become more “synchronous,” the bank echoed previous sentiments of uncertainties around international trade and fiscal policies.

Canada’s economy expanded at an annualized pace of 4.5% in the second quarter, but the bank says it expects that pace to “moderate” in the second half of 2017.

For consumers, a rate increase means borrowing money becomes more expensive. The Bank of Canada’s overnight interest rate directly affects the banks’ prime rate, which in turn dictates whether variable rates (mortgages, lines of credit, and other loans) rise or fall.

Here’s an example using Ratehub.ca’s mortgage payment calculator. If someone buys a $750,000 home with a 10% down payment and a five-year variable rate mortgage of 1.99% amortized over 25 years, their monthly mortgage payment would be $2,944. With the 0.25% interest rate increase, that monthly mortgage payment rises to $3,028, an increase of $84 per month or $1008 per year.

Since the beginning of 2017, homeowners with variable rate mortgages have seen payments increase by $168 per month, or an additional $2,016 per year.

For new homeowners with a down payment of less than 20%, a rate increase will not impact affordability because consumers are stress tested against the Bank of Canada’s qualifying rate of 4.84%. A mortgage affordability calculator can help you determine how your maximum affordability changes, depending on the mortgage rate.

As with its last announcement, the bank emphasized that monetary policy decisions are “not predetermined” and are “guided by incoming data” as it relates to the outlook for inflation. Given the average Canadian owed $22,154 in non-mortgage debt at the end of June (up 2.7% year-over-year, according to TransUnion), the bank acknowledged that “close attention will be paid to the sensitivity of the economy to higher interest rates.”

The Bank of Canada’s next interest rate announcement is scheduled for Oct. 25, and will include the latest Monetary Policy Report.

Source: Bank of Canada