While it had appeared that we had seen the last of the rate increases from the Bank of Canada, they announced this morning that they are increasing their overnight rate by another 0.25%. This means that mortgage lenders can be expected to increase their prime rate by the same margin, which would put it at 6.95%.

This is not what anyone in a variable rate wanted to hear. Or anyone else for that matter. Even the Bank of Canada themselves didn’t want to make this move.

 

Why Did the Bank of Canada Increase their Rate…AGAIN?

In the BoC rate announcement on March 8th, they stated that they are pausing rate hikes, they also said that they would increase further if required.

It all comes down to restoring price stability for Canadians by bringing inflation under control. While no one likes paying higher mortgage rates, we also don’t want to be paying $25 for a loaf of bread or $100,000 for a Honda Civic. Inflation continues to be a problem and the Bank of Canada felt the increase was needed to keep it from getting completely out of control.

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

“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.”

 

How Does This Affect Fixed Rates?

There has been upward pressure on fixed mortgage rates since the beginning of May. This was due to inflation concerns along with the US debt ceiling issue which has since been resolved.  We then received the news of the uptick in inflation on May 16th, which was the first increase since July 2022. This contributed to the spike in bond yields, which have been trending upwards precipitously and have not let up.

As most economists were expecting the Bank of Canada to hold its rate this morning, the news resulted in the yields shooting by almost 7% over yesterday. They have now broken through resistance and are now at their highest point since late 2007. As fixed mortgage rate pricing is largely determined by bond yields, there have been multiple fixed rate increases over the last two weeks. A few more lenders increased their fixed rates again as of this morning with more lenders expected to follow suit.

If the upward pressure on fixed rates continues, then we could soon see 3 and 5 year fixed rates at 6.00%. Let’s hope it doesn’t come to that, but the upward trend in bond yields is not showing signs of easing.

 

The Good News

While fixed rates continue to rise, the Bank of Canada stated this morning that they are still expecting CPI inflation to come down to “around 3% in the summer”. They have been forecasting this for some time, so nice to see that their stance has not changed.

BMO Economics updated their forecast on June 2nd, which reflected the 0.25% increase we saw today. They have not changed their opinion on when they think the BoC will start to cut their rate and still believe that we’ll see the first cut in the first quarter of 2024. The rest of the big banks have yet to update their forecasts which I would expect them to do over the next few weeks. Stay tuned to my future blogs for the updates.

 

Conclusion

There is no way of knowing just how much higher fixed mortgage rates will rise. But once it appears that the downward trend in inflation is restored, then bond yields can be expected to fall. This should then bring fixed rates down with them. But for now, upward pressure on fixed rates continues to be fierce. 

If you have a purchase closing or a mortgage renewal within the next 120 days, then I strongly recommend getting a rate locked in ASAP.

Let’s hope that this is now the last of the rate increases in this cycle, but this is far from guaranteed. Time will tell.

You can read the full Bank of Canada rate announcement, with the next scheduled for July 12th