The Bank of Canada hiked its target for the overnight lending rate by 50 basis points to 4.25% while continuing its policy of quantitative tightening but stated that looking ahead it would need to consider whether the policy rate should rise further—a much more neutral stance than previous announcements.
After the announcement, financial markets were pricing in the potential for one more interest rate hike by the third quarter of 2023.
The Bank noted economic growth was stronger than expected in the third quarter of 2022 and continued to operate in excess demand. The Bank expects growth to stall through the end of the year and into the first half of 2023.
Consumer Price Index (CPI) inflation was unchanged in October at 6.9%, well above the Bank’s target range. The Bank noted short-term inflation expectations remain elevated and added, “the longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched.”
Canada’s major chartered banks are currently advertising five-year fixed mortgage special interest rates of around 5.65%. Home buyers can often negotiate the interest rate for mortgage financing based on their creditworthiness and the degree to which they do other banking business with the mortgage lender.
With the minimum qualifying rate for all mortgages being the greater of the mortgage contract rate +2% or 5.25% as set by the Office of the Superintendent of Financial Institutions (OSFI) and the Department of Finance, the stress-test hurdle in the fixed-rate and variable-rate space is now about 7.5% for new borrowers. All mortgage applicants must qualify for financing based on an interest rate no less than the benchmark five-year lending rate, even if the mortgage is for less than five years.
The Bank of Canada’s next scheduled interest rate announcement will be on January 25, 2023. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in its Monetary Policy Report on the same date.