Economists anticipate higher interest rates next week

The Bank of Canada is widely expected to raise interest rates again next week as part of an ongoing effort to curb consumer prices and cool Canada’s overheated housing market.

With inflation hitting a 31-year high of 6.8 percent in April, Bay Street analysts expect Governor Tiff Macklem and his team of economists to raise the central bank’s overnight rate by another 0.5 percentage point on Wednesday, raising the current rate of one percent to 1.5 percent.

Those rates may seem moderate by historical standards (central bank interest rates generally hovered above two percent until the 2008 financial crisis), but the pace at which rates are being raised is the fastest in more than two decades, part of an aggressive campaign. to curb consumer demand and control inflation.

In April, the Bank of Canada raised its prime rate from 0.5% to 1%, the biggest hike since 2000.

The impact of the bank’s tightening campaign can already be seen in the housing market, where prices fell 12 percent in April, according to the Canadian Real Estate Association.

The higher the rates, the harder it is to borrow money, which means potential home buyers will have a harder time getting down payment financing, while current homeowners pay more on their mortgages.

“The expected rate hike will have a further cooling effect on both 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 cooling.

Josh Nye, a senior economist at the Royal Bank of Canada, said he anticipates rate hikes in June and again in July that would lift the bank rate to 2 percent.

After that, RBC forecasts another two 0.25 percent hikes in September and October, raising the rate to 2.5 percent by the end of 2022, though other economists expect rates to rise to as much as 3 percent by the end of 2022. year.

“The Bank of Canada is focused on inflation at the moment, but once monetary policy reaches a more neutral level, it will have to strike a better balance between prolonging the business cycle and quickly bringing inflation back to target.” Nye said.

“Anyone with an adjustable-rate mortgage should understand what their payment will be with a 50 basis point increase next week, and should budget for additional rate increases totaling one to two percent for the rest of the year,” he said. Laird.

According to ratehub.ca, their mortgage payment calculator shows that a homeowner who made a 10 percent down payment on a $750,000 home with a five-year variable rate of 1.90 percent, amortized over 25 years, has a payment $2,913 monthly mortgage.

If the central bank announces a 0.5 percent increase next week, homeowners’ variable rate mortgage will rise to 2.40 percent and their monthly payment will rise to $3,083.

This means the homeowner will pay $170 more per month, or $2,040 per year, in their mortgage payments.

“While a higher increase may seem like a real squeeze for homeowners now, it may mean more moderate increases for the rest of the year,” said Leah Zlatkin, a mortgage broker and analyst at LowestRates.ca.

Generally, interest rate increases do not affect credit card rates unless consumers do not meet their minimum monthly payments. In those cases, credit card companies can raise interest rates by five percent or more.

In a speech in Montreal this month, Lt. Governor Toni Gravelle said the central bank’s policy rate remains “too stimulative.”

“The increase in interest rates is designed to slow down the economy by making loans more expensive. That tends to slow down sectors like housing,” Gravelle said.

“But this slowdown could be amplified this time around because highly indebted households will face high debt service costs and will likely reduce household spending more than they otherwise would have.”

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