For seven years, the Bank of Canada has not increased its prime interest rates. In July 2017, they announced an increase in key interest rate by 0.25 percent. Soon after, 5 of Canada’s biggest banks announced that the prime rate will rise from 2.95 to 2.7 percent. The prime rate is key when determining the interest rates charged on loans by different financial institutions. For those customers who have already taken loans, they may have to pay higher interest rates as a result of these changes.
The five major banks that made the announcement include TD Canada Trust, The Royal Bank of Canada, Bank of Montreal, Scotiabank and CIBC. This prime rate will affect different lines of credit such as mortgages. Typically, even though the interest rate seems to have increased by a small margin, it will significantly affect some bank customers.
Why Changes in Rate Policy?
According to the governor of the Bank of Canada, Stephen Poloz, these changes are as a result of the growing economy as are going to be reviewed on a quarterly basis. The prime rate is simply the rate that banks use in order to set interest rates for various loans like mortgages that have a variable rate and home equity lines of credit. It is important to consult a mortgage broker in order to determine if the changes will have an impact on your repayments.
In 2015, The Central bank of Canada has announced a significant cut in interest rates in order to cater for the economic crisis. However, the governor announced that this move was effective and hence an increase in the prime rates as overdue.
Prime Rates and Inflation
The hike in prime rates by the Bank of Canada comes after the government had announced that inflation is said to be below central bank’s target. They have estimated an inflation rate of 2% by mid-2024. This move made by the Bank of Canada is likely going to have an effect in the next 18 to 24 months. The bank’s governing council even stated that there seems to be more sustainable growth in different industries and regions in Canada hence the high-interest rates wouldn’t have a very negative impact on bank customers. The government’s efforts to lower the prices of oil is likely to impact on the cost of goods and services in the region. However, there are still risks of inflation from external factors such as trade barriers, geographical events and other economies like the US after the election of president Trump.
Should you expect further rate hikes?
The Bank of Canada is set to announce about the next prime rate in September 6th. However, there has been no indication of a further increase in the prime rate. Additional increase in the prime rate could mean more expensive lines of credit for bank customers. Affected customers can discuss their options with an approved and certified mortgage broker in Toronto to understand how these changes may have affected their lines of credit.
