The Bank of Canada (BoC) will be announcing its 4th consecutive interest hike on July 13th, 2022. This hike will be the most significant in over 3 decades raising the prime rate by 0.75%. This hike follows concerning inflation data from May and June around 7.7%. This will bring the prime rate for mortgages at 4.45% – its highest level since 2008.

The Bank of Canada must break inflation psychology and convince consumers that it intends to rein in inflation as quickly as possible. If the following two rate hikes do not have the psychological impact the Bank of Canada is hoping for, we may be looking at 2 or 3 years before inflation returns close to the BoC’s target of 2%.

Many analysts worry that no matter what the BoC implements inflation may not return to target in the short-term citing structural problems that monetary policy cannot solve: geopolitical conflicts, supply chain issues and climate change, to name only a few.

Fixed rates are hovering between 4.7% and 5.5% depending on conditions and term length and they should remain relatively stable following the next BoC rate hike, as the bond market has mostly priced in this increase. The language that the BoC will use to describe the current outlook during this week’s interest rate announcement may push fixed rates higher, despite the Bond market already expecting the 0.75% increase.

Variable rates currently hovering between 2.8% and 3.4% will increase by 0.75% following this announcement. It is widely expected that another 0.50% increase will occur in September followed by another 0.75% by the end of 2022.

Any borrower should hope that the rapidity of these increases will have the desired effect and lower inflation. If this occurs, interest rates should return to a neutral level sooner rather than later. We should almost encourage the BoC to increase rates and rein in inflation sooner rather than later even if that means paying higher interest in the short term. Sometimes short-term pain is better than long-term suffering.

We remain committed to keeping you informed on the evolution of the market and encourage any borrower to reach out for advice and counsel if needed.

With engagement,

Ryan La Haye