Bank of Canada Raises Target for Overnight Lending Rate, Suggests Further Tightening Ahead


The Bank of Canada hiked its target for the overnight lending rate by 75 basis points to 3.25% while continuing its policy of quantitative tightening and signaling that the policy rate may need to rise further given the outlook for inflation.

Financial markets are currently pricing in at least another 25 to 50 basis points of further interest rate hikes for the remainder of the year.

The Bank highlighted several ongoing factors contributing to higher global inflation and forcing central banks around the world to tighten monetary policy. Among them, continued COVID-19 outbreaks, ongoing supply chain issues, and the war in Ukraine continue to dampen growth and boost prices worldwide. The rate hike decision gives Canada’s central bank the highest policy rate among G7 economies.

The Bank noted while Consumer Price Index (CPI) inflation eased in July due to a drop in gasoline prices, other measures of inflation have indicated a further broadening of price pressures, particularly in the service sector. The bank also mentioned recent consumer and producer surveys suggest short-term inflation expectations remain high and there’s elevated risk inflation could become more entrenched and difficult to combat. The Bank does not expect inflation to return to its 2% target until well into 2024.

The Bank also highlighted the Canadian economy continues to operate in excess demand, labour markets remain tight, and domestic demand remains very strong. The Bank expects the economy to moderate in the second half of this year as global demand weakens and tighter monetary policy brings demand more in line with supply. The Bank also noted, “with higher mortgage rates, the housing market is pulling back as anticipated, following unsustainable growth during the pandemic.”

What does this mean for mortgages?

Canada’s major chartered banks are currently advertising five-year fixed mortgage special interest rates of around 5.14%. 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 and the Department of Finance, the stress-test hurdle in the fixed-rate and variable-rate space is now more than 7% 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 October 26, 2022. 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 at the same time. The final scheduled interest rate announcement for the year will be on December 7, 2022.