Ottawa Real Estate Board

Bank of Canada raises target for overnight lending rate by 50 basis points to 1.5% and signals more hikes to come

As was widely expected, the Bank of Canada hiked its target for the overnight lending rate to 1.5% while stating that the Governing Council is prepared to act “more forcefully” in future interest rate decisions to help bring inflation back to 2% and tame excess demand in the economy.

Traditionally, the Bank of Canada moves interest rates slowly, a quarter point at a time, but with CPI inflation coming in well above the Bank’s forecast and expected to move even higher in the near term, the Bank has raised rates by 50 basis points for two straight decisions.

The Bank noted that inflation globally and in Canada continues to rise, mainly driven by higher energy and food prices. In Canada, CPI inflation reached 6.8% for the month of April. As inflation continues to broaden, The Bank notes that the risk of elevated inflation becoming entrenched has risen.

The Bank also stated that the increase in global inflation is occurring as the global economy is slowing down. They point to Russia’s invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions as to factors that are weighing on activity and boosting inflation.

The Bank highlighted that recent economic indicators suggest that the Canadian economy remains strong and the economy is operating in excess demand, with first quarter 2022 GDP growing by 3.1%. Job vacancies remain elevated, with companies reporting widespread labour shortages, and wage growth has been picking up and broadening across sectors. They also note that housing market activity is “moderating from exceptionally high levels” while noting that consumer spending remains strong.

Looking ahead, markets are currently pricing in further interest rate hikes for all further announcements over the course of 2022, with rates expected to hit 3% by the end of the year.

Canada's major chartered banks are currently advertising five-year fixed mortgage special interest rates of around 4.07%. Home buyers can often negotiate the interest rate for mortgage financing based on their creditworthiness and the degree to which they do other banking business with the mortgage lender. 

With the minimum qualifying rate for all mortgages being the greater of the mortgage contract rate +2% or 5.25% as set by OSFI and the Department of Finance, the stress-test hurdle has recently moved to just above 6% for new borrowers. All mortgage applicants must qualify for financing based on an interest rate no less than the benchmark five-year lending rate, even if the mortgage is for less than five years. 

The Bank of Canada’s next scheduled interest rate announcement will be on July 13th, 2022. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in its Monetary Policy Report at the same time.