The Bank of Canada has once again increased its overnight lending rate, with analysts forecasting future rate increases moving forward.
The interest rate is now placed at 1.75 per cent as of Oct. 24, following its fifth hike since July 2017.
“The Bank has forecasted that rate increases should be expected going forward. The pace of these increases will be determined by household's ability to absorb the higher rates and the rate of inflation,” said James Laird, co-founder of Ratehub Inc. and president of CanWise Financial. “The Bank seems pleased that household credit growth has moderated, and the housing market is showing signs of stabilization across the country."
Penelope Graham of real estate website Zoocasa said the rate hike will affect anyone taking out a mortgage, whether fixed or variable, as the new target increases the rate at which mortgage applicants have to qualify. Under the “stress test” introduced in January 2018, all new mortgage applicants have to qualify at the Bank of Canada posted rate, or their contracted interest rate plus two per cent, whichever is higher.
Graham stated, “As the Bank of Canada has opted to hike its trend-setting interest rate in its seventh announcement of the year, it will once again become more expensive for borrowers to qualify for, and carry, a mortgage. The ripple effect of this and consequent rate hikes on housing affordability will be felt most strongly by first-time home buyers, particularly millennial buyers, most of whom have never experienced interest rates this high in their lifetimes.”
The Bank of Canada said its key interest rate “will need to rise to a neutral stance” to keep inflation close to the target rate. Inflation is currently 2.2 per cent, having been reduced from the 2.5 per cent seen recently, and the BoC pegs “neutral” at around three per cent.
The Bank of Canada’s next scheduled date for announcing the overnight rate target is December 5, 2018.