Good morning!
It’s Bank of Canada week again, and as Governor Tiff Macklem and his team prepared for Wednesday’s decision, signals piled up that Canadians were expecting a 75 basis point hike this week, the largest single hike since the 1990s .
In its policy statement last month, when the bank raised rates by 50 basis points (bps) for the second time, it said it was “ready to act more strongly if necessary to meet its commitment to achieving its inflation target of 2 %.’
Data since then suggest “there’s a good chance he’ll follow through on that hint,” wrote Stephen Brown of Capital Economics.
Inflation was higher than expected in May, reaching 7.7%, a 39-year high. Headline inflation rose to 8.3% in June, an average of 7.6% in the second quarter, much higher than the 5.8% forecast by the bank in April.
Wages also rose 5.2 percent from last June, data showed on Friday.
And worryingly for Canada’s central bank, Canadians’ inflation expectations have also risen. The bank’s quarterly surveys revealed that more than half of businesses expect inflation to remain “significantly” above 2% for at least three years, and consumers expect inflation to remain at 4% in five years.
Commodity prices have fallen recently, with WTI down more than 2% this morning. Copper and iron ore prices are down 20% in the past month, and wheat prices are almost back to pre-war levels in Ukraine. But Capital believes these price moves reflect central bank hawkishness, and if policymakers back off now, commodities will quickly recover.
Unless oil prices fall quickly, Capital expects the Bank of Canada to hike 75 bps on Wednesday and another 50 bps in September. A 25 basis point hike in October would take the rate to 3%, just short of the peak of 3.25% the market expects.
“Even if the bank stops a little sooner than we expect, this would still be one of the sharpest policy tightening cycles in decades,” Brown wrote.
Canadians are already feeling that strain.
Almost 60% of Canadians polled for the MNP Consumer Debt Index this morning said they are already feeling the effects of interest rate hikes, a number that is up significantly from last quarter.
About a quarter of Canadians who participated in the accounting firm’s quarterly survey said they were not financially prepared to handle a one-percentage-point interest rate increase. More than half (58%) said they were concerned about the impact of rising interest rates on their finances, and 55% said they were worried about their ability to cover expenses in the coming year without taking on more debt.
Currently, most five-year fixed mortgage rates range from 4.79% to 5.24%, with variable rates from 2.70% to 3.30%, according to RATESDOTCA.
If the Bank of Canada raises its overnight rate by 75 basis points to 2.25%, prime rates are expected to rise to 4.45%, putting floating rates at 3.45% and above, LowestRates.ca said.
A homeowner with a 2.7% variable rate on a $700,000 home who has a $2,801 monthly payment now would see the payment rise to $3,038, an increase of $237 per month, according to LowestRates.ca’s calculator.
“It’s important to understand that interest rates are cyclical. At some point in the next few years, we will see them go back down,” said RATESDOTCA mortgage expert Sung Lee.
James Laird, co-CEO of Ratehub.ca, says the bond market is signaling that Canadians may get a reprieve after Wednesday’s projected 75 basis point hike.
“Bond yields are down 60 basis points from their peak in mid-June. The easing in bond yields should give consumers some reassurance that the end of rate hikes could happen within the next few announcements,” Laird said last week.
Capital Economics also sees a time when the bank starts cutting rates, but not for at least a year, even if there is an economic downturn.
“It will take some time before the labor market weakens enough to dampen wage growth, and the Bank will have little appetite to start pouring fuel back into the housing market,” Brown wrote. “Therefore, our assumption for now is that the Bank will only start easing policy in late 2023, cutting interest rates back to 2.5%.”
___________________________________________________________
Add Comment