As expected, the Bank of Canada increased their overnight rate by another 0.25% this morning. This means that mortgage lenders will be adjusting their prime rate to 7.20% within the next few days. This is the first time the prime rate has been over 7% in 22 years.

This impacts those with variable rate mortgages and HELOCs (Home Equity Line of Credit).

Fixed mortgage rates have been in danger of increasing further, but this is not a new development. While the BoC has increased their rate by another 0.25%, it does not mean that fixed rates will be increasing by the same margin. Or at all. There are even times when fixed rates can move in the opposite direction.

But what are the odds that we will see this happen again?

 

Fixed Mortgage Rate Movement

As I mention time and time again, fixed mortgage rates are heavily influenced by bond yields. A rate increase from the Bank of Canada does not mean we will see a spike in bond yields. In this case, this morning’s increase was not a surprise. It was exactly what the bond market was expecting which it had already priced in.

At the time of writing this blog, bond yields are down 3.38%. While it’s nice to see them down, we would need to see them continue to decline before we can expect any downward movement in fixed mortgage rates. One day of downward movement is not enough to come to any sort of conclusion on the direction of fixed rates.

The drop is due to US inflation coming in lower than expected at 3.00%, which was announced this morning. This was the 12th straight month in the downward trend which put it at its lowest point since March 2021.

Hopefully this is enough to at least stabilize fixed rates, but it’s far too early to be able to make that call. There is far too much uncertainty to say if fixed rates will rise further, level off, or drop.

 

Will the Bank of Canada Increase Their Rate Further?

In their report, the Bank didn’t even hint as to whether they will need to increase further or pause the hikes. All they said is that they will continue to assess. But in their press conference that followed, BoC governor Tiff Macklem stated that they considered pausing rates again. “We’re taking it one decision at a time. Monetary policy is working. Inflation is coming down. We think we are close”, Macklem said. While this doesn’t mean that the Bank of Canada won’t increase their rate further, the words are at least somewhat promising.

It can take 12 to 24 months for the economy to see the full impact of the rate increases. As this rate increasing craziness began on March 2nd, 2022, the economic effects are just starting to become apparent. As the Bank of Canada knew they had a serious inflation problem to deal with, they had to continue with their rate increases at record pace to keep everyone’s cost of living from spiraling completely out of control.

Here’s an excerpt from this morning’s announcement:

“As higher interest rates continue to work their way through the economy, the Bank expects economic growth to slow, averaging around 1% through the second half of this year and the first half of next year.”

The BoC stated that they expect inflation to stay around 3.00% for the next year. While they were originally forecasting to reach their 2.00% goal by the end of 2024, they have now pushed this out to the middle of 2025. In previous announcements, they have said that they are not expecting to cut their rate until they have reached their target rate of 2.00%. 

The forecasts from the big six banks have been more optimistic than this and had been forecasting that the cuts could start a year earlier. All six are forecasting no more increases in 2023 with cuts to start in 2024.

 

Conclusion

Inflation has dropped considerably from its peak of 8.1% one year ago to 3.40% in May of this year. While this is great, it will be more of a challenge for the Bank of Canada to bring it down by the additional 1.40% needed to reach their target of 2.00%. It’s still uncertain as to whether we have seen the last of the rate hikes or if they will need to increase further to accomplish their goal. 

Let’s keep our fingers crossed that inflation drops further when the next CPI inflation report is released on July 18th.

The next rate announcement from the Bank of Canada is scheduled for September 6th.