The Bank of Canada surprised everyone Wednesday by announcing another interest rate hike, bringing its benchmark rate from 0.75% to 1%.
Few economists had expected a rate hike Wednesday — in fact, only five of 26 economists surveyed by Bloomberg had forecast one. This is the second hike this year, following a move from 0.5% to 0.75% in July.
The hike is expected to have an immediate impact on mortgages for those with variable-rate products, and will result in higher interest costs for everything from personal loans to car loans.
Here’s a look at the impact.
What this means for your mortgage
The last rate hike in July had an immediate effect on Canadian mortgages.
For example, on July 11, the lowest variable, five-year rate on LowestRates.ca was 1.69%. Within 24 hours of the rate hike on July 12, that rate had moved up to 1.90%.
The most recent move should take many five-year, variable rate mortgages north of 2%. On a $500,000 mortgage, a variable-rate customer pays $1,250 more a year after a 25 basis point increase in the interest rate.
Wednesday’s rate hike will have a similar effect. If you’re in the market for a new mortgage, expect fixed-rates to rise as well. The big banks will be the first to raise their rates, as they did earlier this year.
In July, many banks began raising mortgage rates in anticipation of a rate hike. RBC boosted its mortgage rates by 20 basis points. Its five-year, fixed-rate mortgage moved from 2.64% to 2.84%.
Expect similar hikes in the coming weeks from the Big Six.
This is the second hike this year
As mentioned, the Bank of Canada last hiked interest rates at its July 12 meeting. That announcement also signaled a new tone from the central bank — interest rates are going to go up faster and sooner than many expected.
The last time the Bank of Canada raised interest rates was in 2010. However, due to an economic recession in 2015, the bank caught rates twice that year, taking the benchmark down from 1% to 0.5%.
It’s clear the bank sees economic weakness behind Canada.
"The most important thing is the economy clearly no longer need as much as stimulus as we’ve been giving it,” the bank’s governor, Stephen Poloz, said in a press conference following the July rate hike.
The new tone — known in policy circles as being hawkish, since it favours further rate hikes — has reset expectations.
On average, economists surveyed by Bloomberg are predicting up to three more hikes by the end of 2018. Up until earlier this year, many did not expect any rate hikes in 2017 and the first to occur early next year.