Bank of Canada Raise Policy Interest Rate by 0.50%

The central bank raised the overnight lending rate by another 0.50% today, bringing the policy interest rate to 1.50%. This move was widely expected by economists and is the latest move by the Central Bank to rein in rampant inflation.

“The increase in global inflation is occurring as the global economy slows. The Russian invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions are all weighing on activity and boosting inflation. The war has increased uncertainty and is putting further upward pressure on prices for energy and agricultural commodities.”

This increase brings the overnight lending rate just within a quarter-point (0.25%) of pre-pandemic levels when the key interest rate was 1.75%. Consumers have enjoyed record low-interest rates for the past 2 years in Canada, and rising interest rates were an inevitable outcome as the economy attempts to recover post-pandemic.

Although the bank has signaled more rate hikes to come, they need to reach a "delicate balance" between reducing the inflation in the economy, without triggering a full-blown recession. The Bank of Canada Prime not only affects the widely discussed housing market, but also personal loans, business loans, and other costs for various sectors of the economy.

Recap - How Will a Variable Rate Mortgage Be Affected?

Fixed-rate mortgages are unaffected by the interest hike. Variable rates mortgages, on the other hand, will be affected by the trend of the overnight rate. You can expect a 0.50% interest raise on variable rate mortgages following today's announcement.

Based on a 30-year amortization period, for every $100k mortgage amount, when the interest rate goes up by 0.50%, the interest payment increases by roughly $24.

Adjusted Variable Rate

• These are the mortgages that increase your monthly payment when interest goes up (e.g. Scotiabank). You should expect a monthly payment increase starting next month.

True Variable Rate

• These are the mortgages that DO NOT increase your monthly payment when interest goes up (e.g. TD Bank). Instead, the total monthly payment will be re-distributed between the principal and interest.