Canada’s top lenders raise interest rates to 2.7% after central bank raises


© Reuters. A sign in front of the Royal Bank of Canada in Toronto, Ontario, Canada Dec. 13, 2021. REUTERS/Carlos Osorio

By Nicholas Saminather

TORONTO (Reuters) -Royal Bank of Canada, Toronto-Dominion Bank and Bank of Montreal said on Wednesday they will raise their key interest rates for the first time since October 2018, after the Bank of Canada raised its benchmark by 25 basis points.

The higher prime rate, which includes floating-rate mortgages, will rise from 2.45% to 2.7% and will take effect Thursday, the three lenders said.

The Bank of Canada raised interest rates to 0.50% from a record low of 0.25% on Wednesday, saying it should rise further despite heightened uncertainty following Russia’s invasion of Ukraine.

Demand for floating rate mortgages has increased, thanks to the widest gap between them and fixed rates – which have risen alongside bond yields which have risen in anticipation of tighter central bank policy – in 3-1 / 2 years.

According to data from the Bank of Canada, variable-rate loans have accounted for more than half of new mortgages since July.

“We can expect Canadians’ rates to rise more and their mortgage payments to be impacted than in a typical rising interest rate environment,” said James Laird, co-founder of the mortgage rate comparison website Ratehub.ca.

Still, the 25 basis point increase in prime rates likely won’t have a significant effect on housing demand, and are more likely to bite if they rise 1 to 1.25 percentage points, Laird said.

Higher mortgage rates are expected to boost bank credit margins, which have been under pressure from low interest rates.

Canadian banks cut their prime interest rates in March 2020 to their lowest in a decade in response to the coronavirus pandemic, fueling a housing boom, with the average price rising 21% from a year earlier to a record high in January .

Mortgage growth has increased household indebtedness to 177% of disposable income, making Canada’s population among the 10 most indebted in the Organization for Economic Co-operation and Development (OECD), and making debt a major financial vulnerability for the country . [nL1N2SE206]

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