Date Posted: September 7, 2022
The Rate Increase
The Bank of Canada's raising the overnight rate to 3.25% indicates we're still riding the wave of inflation, and it may take longer for the waters to settle. For some Canadians, that means they’ll continue to feel the pinch.
The bank attributes the war in Ukraine, ongoing COVID-19 lockdowns in China and volatile commodity prices as the main drivers of elevated global inflation. With inflation digging into daily expenses and rising rates making variable-rate mortgages, loans and other debt more expensive.
Statistics Canada reported inflation rose by 7.6 per cent in July, down from its peak of 8.1 per cent in June. The drop was mainly due to a decrease in gas prices; however, other price measures for food and services remained high. The Bank of Canada’s efforts to slow inflation has led to interest rates rising throughout the year. The target overnight rate has already risen from 0.25% in January to 3.25% as of September.
What Does This Affect?
The Bank of Canada’s target overnight policy rate affects the interest you pay from lenders like banks. The higher the overnight rate, the more interest you’ll pay. The increase of 0.75 means that for some variable-rate mortgages more of the money you pay each month will be going to interest rather than the principal. And if your trigger rate is reached, you can anticipate higher monthly costs.
Getting Back on Track
Raising interest rates slows spending, which helps put the brakes on inflation. Unfortunately, it’s necessary for a prolonged period of slowed growth to help the economy get back on track. The neutral rate is a rate that doesn’t stimulate or restrict the economy. Presently, the estimated neutral rate is 2.5%.
“Being at 3.25%, it would be in restrictive territory, which means at some point it needs to come back down to what they estimate the neutral rate is.” Explains Karyne Charbonneau, senior economist with CIBC. “They will want to make sure that that inflation is back sustainably […] It's hard to predict exactly when that will be at this point.”
For more information on your mortgage, contact your broker
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