The Bank of Canada June 2022 Rate Hike

On June 1st, 2022, The Bank of Canada increased its target for the overnight rate to 1.5%, with the Bank Rate at 1.75% and the deposit rate at 1.5% and it is expected to increase again. This rate hike announcement follows up on the Bank’s rate hike announcement back in April 2022 to raise rates by 50 basis points to 1%, which was the largest individual rate hike since 2000. This is a large contrast compared to the beginning of the year when the policy rate was at 0.50%. The decision to raise its rate by half a percentage point again is due to high inflation and housing prices. Due to the higher prices for energy, food, gas and properties as well, inflation continues to rise in Canada and globally. Exceeding the Bank’s forecast, the CPI inflation rate in Canada reached 6.8% for the month of April, and it is expected to move even higher in the near term before beginning to ease. Another rate hike is expected at the Bank of Canada’s next meeting on July 13, 2022, with a potential to bring the policy rate to 2.00%

Some highlights from the Bank of Canada’s June 1, 2022 announcement include:

• The Target Overnight Rate will increase by 50 basis points to 1.50%
• CPI inflation of 6.8% is at a 31-year high
• Canada’s housing market has slowed down over the past few months as interest rates rise.
• Quantitative tightening (QT) began on April 25, 2022. This will gradually reduce the Bank of Canada’s balance sheet and put upward pressure on bond yields, which will drive up fixed mortgage rates

Borrowing costs are increasing

When the Federal Reserve raises their rates, it makes borrowing more expensive for consumers. In the week ending on June 9, 2022, the rate for a 30-year-fixed-rate mortgage averaged 5.23%, which is a significant increase from 3% this time last year. This means higher interest rate costs for mortgages, HELOCs, credit cards, student debt and car loans. Small and large businesses will also be impacted by this rate increase. Rate hikes have driven up rates and slowed down sales activity which could potentially cool off home prices.