The Bank of Canada is widely expected to raise interest rates again next week in an ongoing effort to rein in consumer prices and cool the overheated Canadian housing market.
With inflation hitting a 31-year high of 6.8% in April, Bay Street analysts generally expect Governor Tiff Macklem and his team of economists to raise the interest rate on Wednesday. central bank overnight by another 0.5 percentage point, raising the current rate. rate of 1% to 1.5%.
These rates may seem subdued by historical standards – central bank interest rates were typically above 2% until the 2008 financial crisis – but the pace at which rates are being raised is the fastest in more than 100 years. two decades, as part of an aggressive campaign. to slow consumer demand and control inflation.
In April, the Bank of Canada raised its prime interest rate from 0.5% to 1%, the biggest increase since 2000.
Already, the impact of the bank’s tightening campaign is being felt in the housing market, where prices fell about 12% in April, according to the Canadian Real Estate Association.
The higher the rates, the harder it is to borrow money, which means potential buyers will have a harder time securing financing for down payments while current owners are paying more on their mortgages.
“The expected rate hike will have an additional chilling effect on the number of real estate transactions and prices across the country,” said James Laird, co-founder of ratehub.ca.
The central bank is also expected to continue raising rates for the rest of the year, but at a slower pace if central bankers see inflation slowing.
Josh Nye, senior economist at Royal Bank of Canada, said he expects rate hikes in June and again in July that would take the bank rate to 2%.
After that, RBC forecast two more 0.25% hikes in September and October, taking the rate to 2.5% by the end of 2022, although other economists forecast rates could rise to as much as 3%. % by the end of the year.
“The Bank of Canada is currently focused on inflation, but once monetary policy moves to a more neutral level, it will need to strike a balance between prolonging the business cycle and getting inflation back on target quickly,” Nye said.
“Anyone with a variable rate mortgage should understand what their payment will be with a 50 basis point increase next week, and they should plan for additional rate increases totaling one to two percent for the rest of the year. year,” Laird said.
According to ratehub.ca, their mortgage payment calculator shows that a homeowner who put a 10% down payment on a $750,000 home with a five-year variable rate of 1.90%, amortized over 25 years, has a monthly mortgage payment of $2,913.
If the central bank announces a 0.5% increase next week, the homeowner’s variable mortgage rate will rise to 2.40% and his monthly payment will rise to $3,083.
This means the homeowner will be paying an extra $170 per month, or $2,040 per year, on their mortgage payments.
“While a higher rise may seem like real pressure for homeowners now, it may mean more moderate increases for the rest of the year,” said Leah Zlatkin, mortgage broker and analyst at LowestRates.ca.
Generally, interest rate hikes do not affect credit card rates unless consumers miss their minimum monthly payments. In these cases, credit card companies may increase interest rates by five percent or more.
In a speech in Montreal this month, Deputy Governor Toni Gravelle said the central bank’s key rate was still “too stimulative.”
“Rising interest rates are designed to slow the economy by making borrowing more expensive. That tends to slow down sectors like housing,” Gravelle said.
“But that downturn could be amplified this time around as highly indebted households will face high debt service charges and are likely to reduce household spending more than they otherwise would have.”