Bank of Canada ends the year with a 50-bps hike, increasing the overnight rate to 4.25%

The Bank of Canada announced its final, seventh policy interest rate hike of 2022 Wednesday morning, closing out the year with a 50-basis-point increase, and bringing the overnight rate to 4.25%.

“The overnight rate began the year at a record-low 0.25%, indicating a whopping 400 bps of cumulative tightening [in 2022],” says Shelly Kaushik, economist for the Bank of Montreal (BMO).

Largely due to virtually stagnant CPI inflation and excess economic demand, the Bank aims to further dissuade spending and borrowing with this increase before potentially pausing hikes in the future.

Will rate hikes continue in 2023?

The Bank hinted that this could be the last rate hike of its size for some time, taking a milder tone with respect to future moves than in previous announcements.

“Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target,” the Bank said.

BMO’s Kaushik says the Bank will also need time to assess the impact of its decisions next year. “We expect rates to continue to rise through the turn of the year, followed by a period where the Bank holds as it observes the effects of its moves making their way through the economy,” says Kaushik.

BoC governor, Tiff Macklem, has acknowledged the Bank’s effort to avoid over-tightening monetary policy, which could slow the economy more than necessary and negatively impact jobs, debt repayments, and businesses.

The ongoing streak of rate hikes is expected to slow economic growth before supply and demand balance out in 2023.

“The data since the October MPR support the Bank’s outlook that growth will essentially stall through the end of this year and the first half of next year,” the Bank said in today’s announcement.

Bank of Canada will tread carefully amid broad inflation and excess demand

Despite a .01 decimal decrease in September, global inflation is still high, resting at 6.9% in Canada. That said, the Bank is seeing early signs that inflation may have peaked.

“Three-month rates of change in core inflation have come down, an early indicator that price pressures may be losing momentum," said the Bank’s release.

However, the labour market and economic demand are still overheated and supply challenges remain to be solved. According to the Bank, “Canada’s labour market remains tight, with unemployment near historic lows."

But the Bank sounded confident in its announcement today that its streak of rate hikes may finally be starting to have an impact. “There is growing evidence that tighter monetary policy is restraining domestic demand: consumption moderated in the third quarter, and housing market activity continues to decline.”

If consumption fails to decline further, however, this could impact the speed at which inflation cools.

“The longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched,” the Bank said.

What to consider if you’re renewing your mortgage amid higher interest rates

Canadians are increasingly cutting back on spending and prioritizing their finances as inflation remains high. The household savings rate in Canada is up to 5.7%, significantly higher than pre-pandemic, which was below 3%, according to a recent newsletter from Benjamin Reitzes, managing director of Canadian rates and macro strategist at the Bank of Montreal.

If your mortgage renewal is approaching, it’s best to be proactive.

“If you’re wanting to switch out to another lender for a better rate, the earliest to apply is four months prior to the maturity date,” says Victor Tran, RATESDOTCA mortgage expert. “It takes about four weeks to complete a mortgage switch/transfer from one lender to another so there’s no harm to start shopping early.”

Comparing early mortgage renewal quotes within the four-month window is one of the best ways to save in a high-interest-rate environment.

According to National Bank, mortgage costs currently account for 67% of income in Canada. Knowing this, homebuying may still be out of the question for some until rates cool. However, that may take a while.

“The housing market has already begun weakening as interest rates started rising in 2022, and we believe the correction will continue into 2023 as the full impact of rate hikes is felt through the economy,” says Kaushik.

For those planning on purchasing a home in the near term, speaking with a broker and voicing your financial concerns is a must. Ottawa will be reevaluating and announcing any potential changes to the stress test’s minimum qualifying rate on December 15. So, this could also impact mortgage decisions.

“While everyone’s individual financial pictures will vary, homebuyers should continue to exercise heightened prudence,” says Kaushik.

There are always opportunities to prepare for long-term, big-ticket purchases like a home, during temporary financial strain.

“Review your budget and see if you can cut down on expenses that accumulate quickly like ordering take-out or after-work drinks,” says Tran. “It’s a healthy exercise everyone should partake in on a regular basis.”

READ MORE:

October: Bank of Canada delivers 50-basis-point hike, bringing the overnight interest rate to 3.75%

September: Bank of Canada lifts lending rate to 3.25%. We ask a mortgage broker what this means for homeowners and buyers

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