The Bank of Canada’s decision to raise its key rate by 50 basis points on Wednesday will be quickly noticed by holders of variable rate mortgages and Canadians with home equity lines of credit, but if inflation persists and rates need to rise faster – which the central bank chief has acknowledged is a possibility – the effects should not stop there.
“Higher and faster rate increases will affect mortgage affordability for a large population of homebuyers,” Sung Lee, Mortgage Officer at RatesDotCA, told the Financial Post in an email. “Major banks have already raised fixed rates several times in recent weeks, with some approaching the 4% mark for uninsured products.”
Royal Bank of Canada and Toronto-Dominion Bank were the first of the Big Six to react to interest rate developments, raising their prime rates by 50 basis points to 3.20% effective Thursday, the Scotiabank and CIBC quickly following suit.
But the impact of rising rates could extend beyond mortgage repayment charges.
James Laird, co-founder of Ratehub.ca, noted that rising mortgage rates are expected to put downward pressure on house prices across the country. The national average price of a home reached $816,720 in February, according to figures from the Canadian Real Estate Association.
And here, there could be more pressure weighing on Canadian homeowners as Bank of Canada Governor Tiff Macklem has said he’s ready to get more aggressive with interest rate policy depending on economic recovery and inflation outlook, which was 30 years out. high 5.7 percent in February readings, is changing.
“If demand responds quickly to higher rates and inflationary pressures moderate, it may be appropriate to pause our tightening once we get closer to the neutral rate and take stock,” Macklem told reporters during the briefing. a press conference on Wednesday. “On the other hand, we may need to pull rates slightly above neutral for a period to bring supply and demand back to equilibrium and inflation to target.”
The Bank of Canada considers a neutral rate to be between 2% and 3%. Macklem hinted that the benchmark rate could rise above that range, potentially pushing the overnight rate to 3.25%.