The Bank of Canada increased their policy rate by another 0.25% this morning which should not have come as a surprise. 

This means that the prime rate will be increasing from 6.45% to 6.70% which is the highest it has been since 2001.

Through the third and most of the fourth quarter last year, none of the big six banks were forecasting increases in 2023. However, with inflation being stickier than expected, forecasts started to change later in the year. The closer we got to the January 25th announcement date, the more it was looking like we would see a 0.25% increase which was confirmed this morning.

 

Why Another Rate Increase?

It’s clear that the Bank of Canada does not want to take any chances when it comes to inflation. They may have been okay to leave the rate unchanged, but they are erring on the side of caution by moving forward with today’s increase. If they left it unchanged and they were wrong, then that could lead to even more increases.

This doesn’t eliminate the possibility of further rate hikes, but it reduces it. It all comes down to getting inflation under control. We may not like all the rate hikes, but it won’t matter if mortgage rates are lower if the price of everything else quadruples. That may be a little excessive, but I feel it makes it a bit easier to understand why they have been so aggressive with their rate hikes.

 

Rates May Decrease Sooner Than Expected

Despite the increase, there were some very promising comments in the Bank’s report this morning:

  • “3-month measures of core inflation have come down, suggesting that core inflation has peaked.”
  • “Inflation is projected to come down significantly this year.”
  • Inflation is expected to be “around 3% in the middle of this year and back to the 2% target in 2024”
  • They expect to “hold the policy rate at its current level…”.

This is the most promising news to come out of the Bank of Canada since this whole rate increase madness began in March 2022.

Note that this doesn’t ‘guarantee’ that there won’t be any further rate hikes and the BoC will increase further if needed. But given their comments above, the chances are substantially reduced. 

If inflation continues to fall then it’s possible that we could start to see cuts to the prime rate as early as the second half of 2023 as three of the big six banks have been predicting since the 3rd quarter of last year.

 

Downward Pressure on Fixed Mortgage Rates

The Bank of Canada rate does not have a direct impact on fixed mortgage rates. Just because the BoC increases their rate by 0.25% it does not mean that fixed rates will increase by 0.25%. Or at all for that matter. They can even move in the opposite direction which is what has been happening lately.

While there are multiple factors affecting fixed mortgage rate pricing, bond yields are the biggest consideration. At the time of writing, bond yields are down today by 1.34%. The BoC rate increases yet the bond yields are dropping. Despite all the talk about the potential increase leading up to today, bond yields have been trending downward since the beginning of the year which has placed downward pressure on fixed mortgage rates.

If the yields remain at the current level or continue to drop, we could start to see fixed rates start to fall at any time. Some lenders have already dropped their fixed rates with 5 year fixed rates now as low as 4.38% for high ratio (insured) mortgages.

 

Conclusion

With the seemingly never-ending oversized rate increases we saw throughout 2022, and all the uncertainty moving forward, it’s nice to see that there is now some light at the end of the tunnel. While nothing is guaranteed, it’s possible if not likely that we have now seen the end of the rate increases in this cycle. If this ends up being the case, then anyone who stuck with their variable rate mortgage will enjoy riding the rate back down once the cuts begin.

While anything can happen, and time will tell, it’s the most positive news that we’ve seen from the Bank of Canada for some time.

You can read the full announcement from the Bank of Canada here.