The Bank of Canada (BoC) raised its trendsetting interest rate from 0.75% to 1% on Wednesday, prompting Canada’s “Big Five Banks” to increase prime consumer lending rates.
Effective Thursday, RBC, BMO, TD, Scotiabank, and CIBC will all increase prime lending rates from 2.95% to 3.2%. This is the second time since July that BoC has raised its key interest rate. The central bank reported that the Canadian economy is strengthening robustly, which prompted the increase.
“Recent economic data have been stronger than expected, supporting the bank’s view that growth in Canada is becoming more broadly-based and self-sustaining. Consumer spending remains robust, underpinned by continued solid employment and income growth,” BoC said in a statement.
While it sounds promising for the Canadian economy – what does this mean for you?
Borrowing will become more expensive
In general, borrowing from traditional sources will become more expensive. As noted above, BoC’s key interest rate directly affects the prime interest rate of all major banks – now increased by 0.25%. This prime rate affects the variable interest rates on products such as lines of credit and personal loans.
While interest rates on personal loans depend on the individual, borrowing from banks now may be more expensive for Canadians. With consumer debt at an all-time-high – Canadians carry, on average, $22,125 in consumer debt – this change could spook new borrowers.
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A more powerful Canadian dollar
Immediately upon news of the rate hike, the Canadian dollar became much more powerful! It’s currently trading at 81 cents USD, which is the highest worth our currency has reached since June 2015.
So if you’re looking to buy something from a retailer outside of Canada, now may be a good time.
Mortgage rates will increase
If you’re a Canadian with a variable mortgage, you’ve likely already felt the pinch of Wednesday’s increased interest rates.
With all major banks already following suit, it may be worthwhile checking out alternative online mortgage lenders and exploring all of your options.
A potential break for property seekers
In the market for real estate? If you’re a potential home buyer, you may be able to breathe a sigh of relief. Increased mortgage rates may cause the market to cool down, which also happened after the rate hike in July.
So what’s next?
We’re not sure, but BoC may not be done yet. Its next scheduled rate setting is slated for Oct. 25, which is also when it’s due to release its quarterly forecast.
However, BoC isn’t giving too much away. “Future rate hikes are not predetermined and will be guided by incoming economic data and financial market developments,” it said in a statement.