To the likely dismay of variable mortgage holders everywhere, Canada's major banks have officially raised their prime rates following Wednesday's Bank of Canada hike.
RBC, TD, Scotiabank, CIBC, BMO, National Bank, Equitable Bank, and Laurentian Bank all announced this week that they have raised their prime rates from 5.95% to 6.45% in response to the Bank of Canada's 50 basis point increase.
The increases took effect on Thursday, making borrowing costs more expensive for borrowers with variable mortgages, mortgages up for renewal, and new mortgages, unless the borrower had a rate hold in place with their financial institution.
The rate hike will be particularly burdensome for a new crop of borrowers with variable-rate mortgages with fixed payments who have now hit their trigger rate -- the point at which a lender can adjust a borrower’s payments because it is no longer high enough to cover the interest accrued since their last payment -- and now have to significantly adjust their monthly finances. In November, the Bank of Canada estimated that 50% of all variable-rate mortgages with fixed payments had already reached their trigger rate, and that with another 50-basis-point increase, that number would jump to 65%.
But there's some light at the end of the tunnel. In their Daily Economic Update, RBC Economics said that the Bank of Canada's most recent rate hike could very well be its last.
"Rather than suggesting the 'the policy interest rate will need to rise further,' today’s guidance is that 'Governing Council will be considering whether the policy interest rate needs to rise further,'" the RBC report said of the Bank of Canada's policy statement released at the time of the rate increase. "That clearly opens the door to a pause as soon as the next meeting in January, and in our view frames that decision as between 0 and 25 bps."
A pause in hikes would be a relief for home owners, especially those in Canada's priciest real estate markets where rate hikes have had the most profound effects. But what the Bank of Canada's decision will come down to, the RBC report says, is how Canada fares financially over the next seven weeks.
Five-year GoC bond yields were down 75 basis points in the month leading up to the most recent rate hike -- something that may have motivated the aggressive raise. This means that "a further decline in yields could prompt push-back from the BoC, either through another hike in January or emphasis that rates will have to remain high for an extended period," RBC says.
"We expect a challenging consumer backdrop and ongoing pullback in housing will see Canada’s economy slip into recession in the first half of 2023. But with inflation remaining elevated, the BoC isn’t likely to react as quickly to that slowdown as it has in recent cycles."
