• Bank of Canada Raises Overnight Rate by 1%

    July 13, 2022
  • As you have likely heard, the Bank of Canada has made an aggressive move today, increasing the overnight rate by 1.0%. It was widely expected they would increase by .75% so this move came as a bit of a surprise. This is the largest single increase in almost 25 years. 

    The Bank characterized this larger increase as a way to “front-load the path to higher interest rates,” a clear signal that it is concerned that elevated inflation will become entrenched without affirmative action and that more rate hikes are certainly possible. Here is a link to the announcement with more detail:

    Bank of Canada Announcement

    I have talked to a lot of clients about rates lately and it’s hard to know what to do right now, as we are in uncharted waters at the moment. In a perfect world, anyone in a variable rate mortgage would have locked into a fixed rate when rates were 2%. Unfortunately, at the time, the experts were predicting much less severe rate increases so the choice wasn’t so obvious. 

    With today’s increase, the prime rate will now become 4.70%. This means most variable rate holders will now sit at 3.70% – 4.20%, on average, and will see their payment increase accordingly. It is still likely that we will see more increases before the end of the year. If you were to lock into a fixed rate today, the rate would be in the 5.0 – 5.34% range so the variable is still for the time being. 

    Personally, I still like the variable rate, as I feel like if you can ride out this wave of higher rates, it may pay off in the long run. There is talk that we could be heading into some sort of recession in 2023 which would cause rates to decrease and the variable rate would then be more attractive at that time. In the past, the variable rate has always gone up and down, but in the long run it generally does outperform the fixed rate. 

    Like I always say though, choosing to lock in or not lock in is a personal choice that depends on a number of factors (rate, maturity date, risk tolerance, etc.).

    The next Bank of Canada announcement is scheduled for September 7th.