For the second time since July, the Bank of Canada has increased the overnight rate by 25 basis points, now standing at 1%, the federal bank announced September 6.
The rate hike follows news that Canada’s economy is performing better than expected, which has also resulted in the strengthening of the Canadian dollar, now trading at US$0.82.
Sherry Cooper, Dominion Lending Centres chief economist, said, “The Canadian economy is on a tear, dramatically outperforming the US, and the battering by both Hurricanes Harvey and Irma will only widen the disparity.” She pointed out that economic growth in Canada is becoming “more broadly based and self-sustaining,” according to the Bank's press release, and added that the second-quarter GDP stats released last week showed that consumer demand is robust, supported by "solid employment and income growth".
In response to the overnight rate hike, Canada’s big banks are extremely likely to increase their prime rates, which will increase the cost of variable-rate mortgages and other loans.
Canada’s short-term bond yields, which affect fixed-rate mortgages, also surged after the announcement, hitting a five-year high on Wednesday morning.
Following the last interest rate increase in July, mortgage expert Dustan Woodhouse told the Real Estate Therapist radio show, “A quarter-point interest rate movement represents $13 per month, per $100,000 mortgage, for the average mortgage holder. So that’s $52 bucks a month extra on the average $400,000 mortgage balance.”
However, this is the second such rise in two months, and analysts are predicting there could be a third rate rise before the end of the year.
“Future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation,” the Bank of Canada said Wednesday in its statement.
In response to the latest increase, Andrey Pavlov, professor of real estate finance at Simon Fraser University, told REW.ca on Wednesday, “The problem is that people have stretched themselves to the absolute limit to get into the real estate market in Vancouver, and even high-income people actually have very little ability to meet higher expenses. Add to this the higher taxes that seem to be in fashion these days, and the relatively modest interest rate increases would have a substantial impact.”
Listen to Joannah Connolly and SFU professor Andrey Pavlov discussing this week’s interest rate rise and more, on the Real Estate Therapist show this Saturday, September 9, 9-10am, Roundhouse Radio 98.3FM or roundhouseradio.com
