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Prime Follows BoC Overnight Rate Up

It’s official: hundreds of thousands of Canadians will be paying higher interest rates as early as today.

After two years stuck at just 0.50%, the Bank of Canada finally raised its overnight rate by a quarter-point to 0.75%, marking its first rate hike in almost seven years.

Within 2.5 hours of the announcement Wednesday morning, the country’s Big 6 banks started announcing they would raise their prime by the full 25 bps, taking it from 2.70% to 2.95%. (Note that TD Bank’s mortgage prime rate increased by 25 bps to 3.10%, which affects variable rate mortgages. TD is the only big bank with a separate mortgage rate, and previously increased it to 2.85% from 2.70% in November 2016, independent of a BoC rate move).

Flashback to 2015 when the banks chose not to follow in lockstep the central bank’s combined 50 bps in cuts. Instead they reduced their prime rate—the benchmark for variable mortgages and lines of credit—by only 0.30%.

The fact that this full rate hike (unlike last year’s cuts) was passed down to bank borrowers hasn’t gone unnoticed.

“(The banks) are much quicker to pass along the hike when they’re the ones collecting the interest, rather than when they’re the ones paying it,” CanWise Financial President James Laird told the Globe and Mail.

The increase in prime means most adjustable-rate mortgage (ARM) holders and those with lines of credit will see their payments increase as of their next payment date. Variable rate holders won’t see their payments increase, but they will see the interest portion of their payments jump while their principal portion declines.

ARM holders can expect monthly payments to increase approximately $24-25 a month based on an average mortgage debt of $201,000.

Those with thoughts of locking in will notice that fixed rates have already been creeping higher due to a 50+ bps leap in bond yields since early June. In the last 12 months alone, the 5-year yield has tripled.

According to Mortgage Dashboard, the average 5-year fixed rate available through brokers is now 2.46%, up from 2.42% a week ago.

Signals are pretty clear that the Bank of Canada isn’t through with its rate hikes just yet. Many economists expect the bank will raise rates again at its October meeting, with potentially more to follow in 2018.

Here’s a sampling of reaction to the BOC’s rate decision yesterday and expectations for future rate movements:

“The (rate) statement provided little guidance on when we might expect another rate hike, but it is worth noting that today’s move was not necessarily framed as simply walking back some of the stimulus provided in 2015. Rather, we think the bank’s projection that economic slack will be fully absorbed by the end of 2017 raises the risk that policymakers do more than withdraw those 50 basis points of ‘insurance cuts’ over the next year.”

– Josh Nye, Economist, RBC

“And so the tide begins to turn. Today’s rate hike is little surprise and we believe it is an appropriate step…The initial indications are that the Bank fully expects to follow-through with another rate hike (reversing the emergency cuts of 2015)”

– Douglas Porter, Chief Economist, BMO

“Although it’s an unspoken linkage, today’s move needs to be viewed in concert with measures that OSFI, the Department of Finance and provincial governments are delivering to calm the housing boom. While we are looking for a slowdown, the Bank’s 2018 forecast still has housing as neutral for growth (as it did in April) rather than an outright negative, suggesting that it sees the overall cocktail of policy measures (including its own rate hikes) as modest.”

– Avery Shenfeld, Chief Economist, CIBC