The CPI (Consumer Price Index) reached 4.7 percent in October of 2021, the highest level since 2003, and remained steady in November of the same year. When it comes to measuring inflation or deflation, one of the most often used measures is the Consumer Price Index (CPI). As a result of the increase in the CPI, inflation has reached a new 18-year high for the first time.
A rise in the overnight rate is expected in 2022, based on current patterns and forecasts from leading economists in Canada. According to current projections, the first official announcement is scheduled for January 26, 2022. It’s anticipated to rise even more in the months ahead.
Understand CPI
Costs for numerous consumer goods and services, including transportation, food, and healthcare, are weighted in the Consumer Price Index (CPI). It is also employed to keep tabs on changes in the cost of living. The Bank of Canada’s primary goal is to keep inflation at the 2% midpoint of a target range of 1% to 3%. The increase in policy interest rates for both consumers and businesses will lead to higher loan and mortgage interest payments. As a result of their reluctance to accrue further debt, they reduced their discretionary expenditures. When inflation is high, people tend to save more and spend less.
Bank borrowing costs rise when the BoC’s overnight rate is raised because big banks all charge this interest rate for one-day loans amongst themselves. In order to offset the additional costs, consequently, the banks increase their respective prime rates to cover the higher prices. As a result, whether people apply for auto loans, mortgages, or any other type of credit product, the interest rate charged to them is affected by the change in the prime rate. Therefore, the average consumer borrowing capacity will tighten with this increase in BOC’s overnight interest rates.
Impact On Mortgage
Both fixed-rate and variable-rate mortgages, which are the most frequent in Canada, interact with the prime rate in distinct ways. The prime rate does not affect fixed-rate mortgages for their existing term as those rates are locked in. On the other hand, new borrowing and refinancing interest rates often climb and fall in conjunction with the prime rate. Regardless, if for a variable-rate mortgage, the consumer may expect your monthly payment to fluctuate in line with changes in the prime rate. As a result, this interest rate increase will directly impact the purchasing power of every homebuyer.
