Definition
Monetary tightening refers to the cycle where the Bank of Canada (BoC) raises its policy rate (overnight rate target) to slow credit growth and control inflation.
**Transmission mechanism**: 1. BoC raises target rate → banks raise their prime lending rate 2. Variable mortgage rates (prime ± spread) rise immediately 3. Bond yields rise on expectations → fixed mortgage rates rise with a lag 4. Higher borrowing costs → slowing housing demand and inflation
**2022-2023 cycle (most aggressive in 40 years)**: - March 2022: 0.25% → July 2023: 5.00% (+475 bps in 16 months) - First easing: June 2024 (25 bps cut)
**Impact on borrowers**: - Variable mortgage: monthly payment or amortization increases depending on structure - Renewal: shock if renewing fixed during a rate hike period - Stress test: automatically recalibrated (qualifying rate = contract rate + 2%)