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Despite delivering a half-point interest rate hike at its final rate decision meeting of 2022, the Bank of Canada offered borrowers a glimmer of hope that this could be among its last.

On the heels of stronger-than-expected GDP growth in the third quarter and persistently high inflation, the Bank opted for the more aggressive of its two rate-hike options on Wednesday. Markets and economists had been nearly evenly divided in forecasting a 25- or 50-bps increase.

“Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target,” read the Bank’s statement.

That was the first major deviation from previous statements, in which it regularly said rates “will need to rise further.”

By the numbers

Bank of Canada overnight target rate4.25%Prime rate6.45%Total rate tightening in 2022400 bpsMarket odds of a 25-bps rate hike on January 25, 202336%

“That language closes the door to further hikes a touch more than what they had already intimated in the October statement, but nevertheless leaves it open,” wrote Scotiabank economist Derek Holt. “The forward guidance sounds more conditional, which increases optionality into the January 25 meeting, which, in today’s world, may as well be a decade from now.”

In its statement, the Bank suggested there are three factors that will drive its decision as to whether or not further hikes are warranted.

“Governing Council continues to assess how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding,” it said.

In plain terms, it means the Bank will be focused specifically on GDP, inflation and jobs figures, along with the progression of supply chain pressures, said BMO chief economist Douglas Porter.

“Today’s relatively aggressive hike suggests that the Bank remains acutely concerned about still-high inflation expectations, even amid a clear cooling in domestic demand and some early indications that underlying inflation is losing momentum,” he noted. “In recognition of those latter factors, the Bank has opened the door to the possibility that this could be the last rate hike of the cycle.”

CIBC chief economist Avery Shenfeld added that this tightening cycle has likely reached its “zenith,” but that “we’ll need the pain of these higher rates to persist for a while to stall economic growth and thereby cool inflation.”

“Part of what the Bank of Canada is counting on to restrain demand is the squeeze that will be felt on households as mortgages renew at higher rates, so it’s unlikely to want to provide quick relief on that front,” he added.

Prime rate rises to 6.45%

By Wednesday afternoon, Canada’s big banks had announced a half-point increase to their prime rates, bringing them to a 15-year high of 6.45%, effective Thursday.

This will increase borrowing costs once again for those with a variable-rate mortgage or home equity line of credit (HELOC).

As usual, mortgage clients of TD Bank will see their prime rate rise slightly more, to 6.60%. It’s the result of an additional 15-bps hike the bank made to its mortgage prime rate in 2016 independent of a Bank of Canada rate move.

The general rule of thumb is that for every 0.50% rate increase, monthly mortgage payments increase about $25 per $100,000 of debt, based on a 25-year amortization.

With the 400 bps of cumulative rate increases in 2022, variable-rate borrowers are facing a roughly $200-higher monthly payment per $100,000 of mortgage compared to the start of the year.

Unsurprisingly, the increase in both variable and fixed rates has further eroded housing affordability, which, previous to the rate hikes, was impacted by rapidly rising home prices.

According to a recent report from National Bank of Canada, affordability deteriorated for the 11th consecutive quarter in Q3, reaching levels not seen since the early 1980s.

“As a result, the mortgage on a representative home in Canada now takes 67.3% of income to service, the most since 1981,” the report’s authors wrote.


Featured image by Justin Tang/Bloomberg via Getty Images

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