Bank of Canada Increases Overnight Rate by 1%

The below is directly from the Bank of Canada on the reasonings for the rate change.

Bank of Canada link

FIRST THOUGH, A QUESTION TO NIKOLE, DOES THIS ANNOUNCEMENT CHANGE ANY OF YOUR ADVICE TO CLIENTS?

Not one bit. I looked at this announcement and said ok, crappy, and kept reading my emails. This is how the markets work, expect the unexpected. Covid is the most recent example of that. And if inflation doesn't settle, expect another increase. My hope is that this works to tame inflation and we start saving money everywhere else to offset the increased interest cost. Here is my advice:

1) Calm always makes better decisions. A lot of the headlines you see are scaring you into a read. And how do you feel after? AWFUL? SCARED? I do too when I read that stuff. The market is like being on a rollercoaster in the dark. You really do need to take it all with a grain of salt because the direction can change so fast.

2) I prefer getting my info from Bank of Canada directly. Their reports are full of stats and thats what I want. Also reading their releases will be a lot less stress because it won't feel like such a blow in a scary headline, but a rational, well thought out plan to help us going forward.

3) Budget at 1% over the actual rate on any fluctuating facilities (lines of credit, variable mortgages).

This rate increase today didn't make me want to change one of my own fluctuating products, that honestly didn't even occur to me, because all the other benefits of those products are still there. I still feel more concerned about the fixed rate penalties on the higher rates, more so than any variable rate fluctuations.

I'm not saying don't pay attention, I'm not saying switching your mortgage type may not be the best for you (call me), I'm not saying don't curse when it goes up (we always want it to only go down); I'm just saying don't let the scare reports throw you off track. Whoever is the scariest gets the most clicks, isn't that how it goes? Gee I'd get none lol. The sky isn't falling folks, Bank of Canada is doing the right things to helps us with inflation. Don't worry it will be another issue soon and who knows what direction it will say then. Prime goes UP - DOWN - OR HOLD. Sept 7th is the next date Bank of Canada reviews the overnight lending rate. Turn off the news and social media scare tactics, take a step back and read what Bank of Canada actually had to say.....

Bank of Canada Release July 13, 2022

The Bank of Canada today increased its target for the overnight rate to 2½%, with the Bank Rate at 2¾% and the deposit rate at 2½%. The Bank is also continuing its policy of quantitative tightening (QT).

Inflation in Canada is higher and more persistent than the Bank expected in its April Monetary Policy Report (MPR), and will likely remain around 8% in the next few months. While global factors such as the war in Ukraine and ongoing supply disruptions have been the biggest drivers, domestic price pressures from excess demand are becoming more prominent. More than half of the components that make up the CPI are now rising by more than 5%. With this broadening of price pressures, the Bank’s core measures of inflation have moved up to between 3.9% and 5.4%. Also, surveys indicate more consumers and businesses are expecting inflation to be higher for longer, raising the risk that elevated inflation becomes entrenched in price- and wage-setting. If that occurs, the economic cost of restoring price stability will be higher.

Global inflation is higher, reflecting the impact of the Russian invasion of Ukraine, ongoing supply constraints, and strong demand. Many central banks are tightening monetary policy to combat inflation, and the resulting tighter financial conditions are moderating economic growth. In the United States, high inflation and rising interest rates are contributing to a slowdown in domestic demand. China’s economy is being held back by waves of restrictive measures to contain COVID-19 outbreaks. Oil prices remain high and volatile. The Bank now expects global economic growth to slow to about 3½% this year and 2% in 2023 before strengthening to 3% in 2024.

Further excess demand has built up in the Canadian economy. Labour markets are tight with a record low unemployment rate, widespread labour shortages, and increasing wage pressures. With strong demand, businesses are passing on higher input and labour costs by raising prices. Consumption is robust, led by a rebound in spending on hard-to-distance services. Business investment is solid and exports are being boosted by elevated commodity prices. The Bank estimates that GDP grew by about 4% in the second quarter. Growth is expected to slow to about 2% in the third quarter as consumption growth moderates and housing market activity pulls back following unsustainable strength during the pandemic.

The Bank expects Canada’s economy to grow by 3½% in 2022, 1¾% in 2023, and 2½% in 2024. Economic activity will slow as global growth moderates and tighter monetary policy works its way through the economy. This, combined with the resolution of supply disruptions, will bring demand and supply back into balance and alleviate inflationary pressures. Global energy prices are also projected to decline. The July outlook has inflation starting to come back down later this year, easing to about 3% by the end of next year and returning to the 2% target by the end of 2024. (this is nikole typing - folks this is the reason prime rates rose as they mentioned above)

With the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates by raising the policy rate by 100 basis points today. The Governing Council continues to judge that interest rates will need to rise further, and the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation. Quantitative tightening continues and is complementing increases in the policy interest rate. The Governing Council is resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target.

Nikole again - We will NEVER know which way it will go, ever, so let's get over that and roll with things as they happen.

Any questions, happy to help. Thanks for reading!

Nikole Krupka Rolof

Edmonton Mortgage Broker

TMG The Mortgage Group

brokeryeg.ca