In its most recent Monetary Policy Report, the Bank of Canada announced a change in its overnight rate (also known as the key interest rate). For the first time in almost seven years, the BoC is increasing the rate, this time by a quarter point from 0.5% to 0.75%. Since July 2015, the rate has sat at 0.5%, and the last time the bank increased its rate was August 2010.
"Today, we raised our key policy rate by 25 basis points in the context of an economy that is approaching full capacity, and with inflation expected to reach the two per cent target within the next year," said Bank of Canada governor Stephen Poloz during a press conference. “Recent data have bolstered the Bank’s confidence in its outlook.”
According to the bank, a rate hike was warranted as Canada’s economic factors are trending upwards, like household spending, increases in employment and wages, lower oil prices, and business investment growth.
What Is the Overnight Rate?
Eight times a year, the BoC announces any changes to the overnight rate. This rate indicates the interest rate banks charge each other as they lend money amongst themselves. Whenever there is a change in the overnight rate, other banks typically follow suit and adjust their prime interest rates.
Increased Prime Rates and the Impact on Consumers
The Bank of Canada’s overnight rate heavily impacts the prime rates of commercial banks, which can subsequently affect loans, lines of credit, the real estate market, and most particularly, mortgages.
Shortly after the announcement, all five of the big banks – Bank of Montreal, CIBC, Scotiabank, The Royal Bank of Canada and TD Canada Trust – announced they would increase their prime rates by a quarter point as well – from 2.7% to 2.95%.
So what should consumers expect now that rates have increased? The rate hike means higher borrowing costs for Canadians. Anyone currently with a variable rate mortgage or a floating rate loan, like a line of credit, will more than likely have to pay more to service it. A higher borrowing rate also means Canadians will qualify for less when applying for loans. Potential homebuyers also won’t be able to offer as much since they’ll have to pay more interest on their mortgages.
If you are a homeowner or potential homeowner facing changing rates, you can view the best mortgage rates in your region here at Rates.ca.
Rates Are Still Low, but More Hikes Likely to Come
While Poloz notes that interest rates are still relatively low, he explained the BoC will continue to gauge how the economy and Canadian consumers are impacted by the slight increase.
But with Canada’s economy showing strength and the BoC’s optimism, economists are now expecting rates to increase one more time in 2017.
The next scheduled Bank of Canada announcement is Sept. 6, 2017.
