Bank of Canada Increases Policy Interest Rate - 03/02/22

On March 2, 2022, the Bank of Canada has increased the policy interest rate for the first time since 2018.

Let’s get into what this means, and how it impacts you.

The benchmark interest rate is now 0.5% from its previous 0.25% for the first time since 2018.

This is the first time in Canadian history that the interest rate has increased 100% (from 0.25% to 0.5%).

The BOC increased the target for the overnight rate to half a percent, with the Bank Rate at three-quarters of a percent, and the deposit rate at half a percent.

When the overnight rate has increased, in the simplest way, this means it becomes more expensive to borrow money.

Despite this, the decision is not expected to alter the real estate market, because it will take many interest rate increases before costs will rise significantly.

The Bank of Canada cites that the Russian invasion of Ukraine has increased uncertainty on the global stage. With rising oil prices and volatility in the financial market, things are changing rapidly and the Bank of Canada is monitoring closely.

In terms of the most recent coronavirus variant, Omicron, the Bank of Canada reports that most economies have bounced back quickly and that many constraints on the supply market have eased or are beginning to.

Increases can also be seen in the CPI, which is currently at 5.1%. These price increases can be attributed to poor harvests, high transportation costs, and the uncertainty of the invasion of Ukraine.

DEFINE CPI:

CPI is Consumer Price Index - it measures the average price of consumer goods and services. This number represents the inflation of consumer prices.

The Bank of Canada states that “as the economy continues to expand and inflation pressures remain elevated,” interest rates will need to continue to rise.

So what does this mean for me?

Buyers

Despite this being a unique change as of recent years, this small increase will have a limited effect on your ability to buy a home.

However, investors believe that there are more hikes to come. If this is the case, then you could see a larger increase in your mortgage payments.

Sellers

First and foremost, if you are selling to buy another home, ensure to read the section above!

While most buyers aren’t pushing to the maximum price that they can afford, you will still likely see a change in the number of people in your buyer pool.

Home-Owners

If you currently have a variable rate mortgage, you will see a slight increase to your monthly payments. We have already seen proposed increases from some banks. Royal Bank has raised its prime lending rate from 2.45% to 2.7%.

The next announcement from the Bank of Canada on interest rate decisions will be out April 13, 2022.