How your finances might be affected by the most recent Bank of Canada interest rate increase

How your finances might be affected by the most recent Bank of Canada interest rate increase

The Bank of Canada stated on January 25 that its overnight lending rate would increase by 0.25% to 4.50%. In light of the most recent disclosure, Economists examine the effects of rising interest rates on inflation, mortgages, and the outlook for the coming year.

The hot subjects of 2022 were rising inflation, interest rate hikes, and rumours of an imminent recession. Some of these themes seem likely to persist in 2023.

The Bank of Canada began boosting its overnight lending rate in March 2022 after two years at a record-low 0.25% in a bid to stop inflation from approaching 40-year highs.

This week's rise marks the eighth rate increase by the Bank of Canada since March of last year. The Bank continued its aggressive rate increases into 2022, including a 100-basis point, or 1 percentage point increase in July. Currently, the overnight rate is 4.5% as of January 25, 2023.

All Canadian banks' willingness to lend money to consumers and businesses is influenced by the central bank's interest rate policies. This means that, the rate hike may have an impact on both your lenders Prime Rate and Mortgage Prime Rate, which are the variable yearly interest interest rates that lenders uses as a benchmark when determining the interest rates paid on its variable-rate mortgages.

What does this possibly signify for mortgage rates, consumer spending, and what might come beyond 2023?

Will Canadian interest rates rise?

Some economists predict that interest rates have most certainly reached their peak at this point. In a recent analysis, TD Economics predicted the overnight rate will peak at 4.50% after eight rate hikes over the course of eight scheduled announcements between March 2022 and January 2023, and that the announcement on January 25 will be the final rate hike in the current cycle.

Will this have an impact on mortgage rates?

A change in the overnight rate by the Bank of Canada may have an impact on the interest rates that financial institutions charge their clients for particular products. If the Bank of Canada adjusts the overnight rate, which could lead to a change in your lenders Prime Rate, your interest rate could change over the life of your variable rate mortgage.

If you have a fixed rate mortgage, you are shielded from interest rate increases until the end of the term.

However, whether you currently have a fixed or variable rate mortgage, if your mortgage is up for renewal this year, your interest rate (and mortgage payments) may increase.

For more information to help you understand the impact of interest rate changes on your mortgage, please read this article, What can rising interest rates mean for homeowners?

When will Canadian interest rates decrease?

One of the main concerns of many Canadian homeowners is this. Although the Bank of Canada's pronouncement this week may signal the end of the current cycle of tightening monetary policy, don't anticipate rates to start falling right away.

Some economists, predicted that by 2023, Canadians' debt service ratio—the percentage of income they devote to paying interest on debt — would be at an all-time high, which will constrain their ability to spend.

Every quarter that rolls around, more and more people will be renewing their mortgages at this higher rate level and eating up their discretionary income, which means you're not going to be able to spend in other areas.

Economists expect a fall in consumer spending in the second half of 2023 as a result of Canadians' need to tighten their budgets. The Bank of Canada is anticipated to start reducing interest rates around the end of the year as a result of this economic weakness.

The Bank of Canada is expected to begin lowering its overnight rate by the end of 2023, with the rate hitting 2% by 2025, according to TD Economics' long-term prediction for December 2022.

What might this imply for finances at home?

Inflation may have peaked according to some long-term predictions, but according to TD Economics, "strong inflation and rising interest rates will progressively have an impact on spending and hiring in 2023 and through 2024."

Even as the Bank of Canada approaches the end of its rate hiking cycle, the impact of higher rates on household finances is only just beginning.

The labour market has shown to be highly resilient thus far. According to Statistics Canada, the economy added 104,000 employment in December as 2022 came to a successful conclusion. However, reducing wage and inflationary pressures is hard without the labour market also cooling, therefore economists anticipate an increase in the unemployment rate over the upcoming months as slower economic growth weighs on businesses and probably results in job cutbacks.

In its long-term prediction for December 2022, TD Economics projects that the unemployment rate would rise by roughly 1.5 percentage points to reach a peak of 6.5%, which entails the loss of around 100,000 jobs.

On March 8, 2023, the Bank of Canada will issue its next interest rate.

Are you looking to get a mortgage, or re-finance one you already have? Get in touch and let me help you navigate the sometimes hard to predict mortgage market. 

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