After a long year of seven rate hikes, the Bank of Canada announced its eighth consecutive increase Wednesday morning, starting 2023 off with a 25-basis-point jump and pushing the policy rate to 4.50%.
With 9,784 Canadian insolvencies filed in November, the highest number since March 2020, this hike may be the last straw for many balancing outstanding debt and mortgage payments.
“The overall impact to an individual will depend on how much debt they are carrying and, as a result, the impact to their monthly payments with the increased interest,” says Michelle Statz, licensed insolvency trustee at Bromwich+Smith. “It may mean attempting to lock in lines of credit to a fixed rate to protect against any future interest rate increases, or locking in your variable rate mortgage to stop any potential increase.”
According to the Bank, “there is growing evidence that restrictive monetary policy is slowing activity, especially household spending.” However, excess demand continues to put pressure on the cost of many goods.
If consumer spending drops further and demand comes closer to balancing with supply, this may be the last hike before the Bank holds.
“If economic developments evolve broadly in line with the MPR outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases,” the Bank said in its release.
Inflation and household spending are easing, but require further monetary tightening
Despite lowering in December, inflation is still at 6.3%. Therefore, further tightening is required to reach the Bank’s 2% target. However, the worst is likely behind us.
“Year-over-year measures of core inflation are still around 5%, but 3-month measures of core inflation have come down, suggesting that core inflation has peaked,” the Bank said.
Canada’s economy is also still in excess demand. However, as activity slows, “inflation is projected to come down significantly this year,” the Bank said. “Lower energy prices, improvements in global supply conditions, and the effects of higher interest rates on demand are expected to bring CPI inflation down to around 3% in the middle of this year and back to the 2% target in 2024.”
How will the eighth hike impact mortgage renewals and debt balances?
The 0.25% hike will have a direct impact on monthly mortgage payments. “This translates to an increase of about $14 per month for every $100,000 borrowed,” says Victor Tran, RATESDOTCA mortgage expert. “It may not impact some people, but it could push many to their breaking point and really consider cutting costs elsewhere (spending less on food, entertainment, gas, etc.).”
When we look at the going rates for fixed mortgages and variable-rate mortgages, those on a variable mortgage approaching the end of their term can get a lower rate by going with a fixed rate for their next term.
“Canadians with mortgages up for renewal should consider fixed rates as they are about the same or lower than the current variable rate,” says Tran. “There is a good chance the Bank of Canada will increase rates again after January 25.” How good a chance is still up for debate, however. The Bank said its “Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target.”
It’s important to put your current lender to the test by shopping around before you renew. Comparing mortgage rates is the best way to start the search for the most affordable rate. As for debt balances, some may have to borrow more at a lower rate to simplify their repayment plan.
“Consolidation may be an affordable option where you consolidate your debt into one payment, again at a fixed loan rate,” says Statz. “Take an honest look at your budget and if you are only making minimum payments, you may want to seek advice from a licensed insolvency trustee on other options that may allow you to deal with your unsecured creditors while keeping your home and mortgage intact.”
December: Bank of Canada ends the year with a 50-bps hike, increasing the overnight rate to 4.25%
October: Bank of Canada delivers 50-basis-point hike, bringing the overnight interest rate to 3.75%
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