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Royal Bank of Canada lifts prime rate to 2.7% after central bank hike -Breaking

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© Reuters. The Royal Bank of Canada sign in Toronto (Ontario), Canada. December 13, 2021. REUTERS/Carlos Osorio

Nichola Saminather

TORONTO (Reuters] – The Royal Bank of Canada announced on Wednesday that it will raise its prime interest rate to 2.7% from 2.45%. It did this after Canada’s central bank lifted its benchmark rate by 25 basis point.

Lender said that the increase in the prime interest, to which variable rate mortgages are linked, will be effective on Thursday.

The Bank of Canada increased interest rates Wednesday for the first ever time since October 2018. They were at record lows of 0.2% and 0.50%, respectively. It also said that there would be an increase in inflation despite greater uncertainty due to Russia’s invasion of Ukraine.

Variable-rate mortgages have grown in popularity among home owners, thanks to the widest gap https://www.ratehub.ca/historical-mortgage-rates-widget between them and fixed rates — which have been climbing alongside bond yields that have risen in anticipation of tighter central bank policies — in 3-1/2 years.

In December 2016, variable loans accounted for 28% of all outstanding mortgages. This is the largest proportion in central bank data since 2016. These loans have been responsible for more than half of all new mortgages in July, and they were at 55% December. This is the highest percentage since 2013, when the Bank of Canada started tracking data.

James Laird (co-founder Ratehub.ca), said that variable rate mortgages were more popular in Canada this year. “We can expect more Canadians’ rates to go up and for their mortgage payment to be affected than in a typical rising rate environment.”

Laird indicated that it is unlikely that Laird’s 25-basis-point rise in prime rates would have any significant effect on housing demand.

The rate of increase is more likely when it rises 1 to 1.25 percentage point, but supply limitations and the growth in immigration mean that there are no guarantees that the market will turn in buyers’ favor, he stated.

However, higher mortgage rates are good news to lenders as they will likely bring a long-awaited increase in bank profits, which are currently under pressure from low interest rates.

Canadian banks saw their prime rates fall to the lowest levels in 10 years in March 2020, as the governments of the country imposed restrictions and lockdowns in the wake the the outbreak of coronavirus. The housing boom has been fuelled by easy credit, which saw the average home price rise 21% from last year to an all-time high.

Since 2016, nearly 90% of all credit was based on mortgages. This has increased household debt by 177% to 175 percent of income. According to Statistics Canada the nation is one of 10 nations with the highest levels of national debt in the Organization for Economic Co-operation and Development.

Canada’s financial regulator and central bank have repeatedly mentioned housing market imbalances as well as high household debt, which are the major financial risks facing Canada.

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