The Bank of Canada has raised its target overnight by .25%, taking it to 4.75%, the highest since April 2021..In its statement, the bank said “Canada’s economy was stronger than expected in the first quarter of 2023, with GDP growth of 3.1%. Consumption growth was surprisingly strong and broad-based, even after accounting for the boost from population gains. Demand for services continued to rebound. In addition, spending on interest-sensitive goods increased and, more recently, housing market activity has picked up.”.“The labour market remains tight: higher immigration and participation rates are expanding the supply of workers but new workers have been quickly hired, reflecting continued strong demand for labour. Overall, excess demand in the economy looks to be more persistent than anticipated.”.The employment report from Statistics Canada will be released next week..The rate of inflation was a large influence in the bank’s decision..“CPI inflation ticked up in April to 4.4%, the first increase in 10 months, with prices for a broad range of goods and services coming in higher than expected. Goods price inflation increased, despite lower energy costs. Services price inflation remained elevated, reflecting strong demand and a tight labour market,” said the bank, adding it “continues to expect CPI inflation to ease to around 3% in the summer, as lower energy prices feed through and last year’s large price gains fall out of the yearly data.”.“However, with three-month measures of core inflation running in the 3.5% to 4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target.” .The bank indicated, but declined to outright say, more hikes should not be ruled out in the future..“Governing council will continue to assess the dynamics of core inflation and the outlook for CPI inflation,” it said. “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.”.What it means for Canadians with variable rate mortgages or large home equity lines of credit is an immediate increase in payments, said Toronto-based mortgage broker Ron Butler of ronbutlermortgage.ca.“These people feel this stuff instantly,” Butler told Storeys. .Butler said the general rule of thumb when it comes to variable rate mortgages is an extra $20 per month for every $100,000 on a mortgage. .“On an $800,000 mortgage, that translates to another $160 per month at a time when most Canadians are already feeling cash-strapped,” he said. “They were all stress tested at 5.25%, by the way but (rates have) exceeded the stress test, so people are feeling stressed. There’s no point trying to pretend they’re not.”.Banks have shown flexibility with clients in order to keep them in their homes and prevent a storm of defaults, reports Storeys..“Both TD and CIBC are allowing variable-rate lenders who hit their trigger rate, the point at which a borrower’s payments no longer cover all of the interest, to add the outstanding unpaid interest to the original loan amount,” says Storeys. “This is in line with Canada Mortgage and Housing Corporation regulations, which allow mortgages to grow up to 105% of the original loan amount.”.Banks have taken other steps, said Butler..“Virtually every single bank is offering a reset to 30-year amortization,” he said, noting in one instance, he saw a mortgage that was down to 14 years reset at a 30-year amortization after the borrower called the bank saying he can’t handle the increased payments. The change dropped the borrower’s payments by roughly $750 a month..“That’s the bank suggesting it, that’s not the customer begging for it,” Butler said..Butler said those looking for fixed-rate mortgages may not notice much of a rate difference, if any at all..“For fixed rate mortgages, the bond market has already priced in at some point, in either this meeting, the July meeting, or the September meeting, that it will go up by 25 basis points,” he said. “So, with the bank’s increase, it would have only minimal impact on fixed rates.”.Butler, expecting the bank will eventually start cutting its rate, recommends fixed-rate mortgages on short terms of two to three years..“The cuts may be far away, they may be the middle of next year, they may not if there’s a big recession by October,” he said. “We’re all talking about a chance the rate will go up, so that would be a terrible bet to take a variable.”.The bank’s next rate announcement is July 12.
