There could be some bad news for anyone with a mortgage this week as speculation mounts that the Bank of Canada is gearing up to raise lending rates again.
After repeatedly raising its benchmark rate in an attempt to contain runaway inflation, the central bank halted the hikes in January, saying it needed time to measure the impact on the economy.
That pause, while a strong indication that the bank hoped the battle was won, was far from certain, as central bank governor Tiff Macklem made clear in a speech shortly after the decision.
“This pause is conditional,” he said. “It depends on whether the economy develops as we think and whether inflation continues to fall.”
Since then, some data has come out indicating that those conditions are no longer met, as the Canadian economy continues to run hotter than the central bank would like – perhaps enough to force Macklem to step off the sidelines again.
Economy is heating up
The Canadian economy grew at an annualized rate of 3.1 percent in the first quarter, Statistics Canada reported last week. That is much more than what the central bank predicted when it took its foot off the brake.
That stronger-than-expected GDP figure came on the heels of inflation data for March, which showed the country’s inflation rate rose slowly to 4.4 percent in April. That was a reversal after nine consecutive monthly declines.
Stronger-than-expected output and inflation suddenly going the wrong way would normally be the kind of thing that could force a central bank to step in and cool things down.
Investors certainly seem to think there is an opportunity. Trading investments known as swaps, which bet on future central bank interest rates, imply there is about a 40 percent chance of a small increase in central bank interest rates on Wednesday, bringing it to 4. 75 percent come.
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That’s bad news for anyone with a mortgage, as interest rates on loans, which have also surged this year, are poised to go even higher.
Ron Butler, a Toronto-based mortgage broker, says variable-rate mortgages have suffered the greatest damage from rate hikes to date, and if the central bank decides more are needed, the impact would be dramatic and immediate.
“In many ways, for the variable rate people… it could be the last straw and force them to take really drastic measures,” he said in an interview.
Despite the dramatic rise in borrowing rates to date, only a small percentage of borrowers have actually felt their payments, as fixed-rate borrowers tend to be locked in for several years at a time, and even most variable-rate loans interest have fixed payments that simply incur additional costs. years on the loan instead of increasing the payment when interest rates rise.
Regardless of what the central bank does this week, the market has moved into a new normal of higher interest rates, and it’s a slow-moving wave that will continue to hit people for years to come as they extend or buy.
“There will be no more 2.49 rates, no more 2.99 rates,” he said. “Maybe a rate that starts with a three, but usually a rate that starts with a four, will become the new normal for people, and it’s going to be very difficult for Canadians to afford homes in the big cities.”
Butler says the cost of carrying a $500,000 mortgage has already increased by $1,131 per month in the current cycle — and that’s before any more increases come this week.
“That’s a significant impact on everyone,” he said. “Their payments are high and in a year or two they will be facing, who knows, hopefully a lower rate, but maybe even a higher rate.”
That’s exactly the scenario homeowner Steven Lawrence hoped to avoid.
Lawrence and his husband have owned a two-bedroom apartment in Vancouver for nearly a decade on a 2.8 percent fixed-interest loan. But that loan was up for renewal at the end of May, a major source of fear in the home as the couple faced rates of six percent and above in some cases.
They ended up paying a rate of just over 4.8 percent for three years, a loan that will cost them an additional $856 each month. With a two-year-old’s childcare bills to pay, Lawrence says their mortgage eats up every penny of the wiggle room they got from the introduction of subsidized childcare earlier this year, but it was worth it for the peace of mind.
“It’s certainly not ideal, but it’s … doable,” he told Breaking: in an interview. “I mean, I’d rather $850 go towards vacations or stuff for my baby (but) at least I don’t have to watch if there’s an interest rate hike.”
“I’m sure there are millions of other Canadians who are in the same boat or will be in the same boat for years to come if interest rates remain this high.”
If not now, then later
The consensus among economists is that the bank will not raise this week, but even those who think there will be no increase this week agree that there will probably be another one this year.
Veronica Clark was the first major economist to advocate for a rate hike, a position that has gradually been followed by a handful of others. For her, the rationale is simple: the conditions set by the Bank of Canada for a pause are no longer met.
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Citibank’s Veronica Clark thinks the Bank of Canada should raise its lending rate on Wednesday, and even if the central bank surprises her and doesn’t, she explains the many reasons why they will probably have to do so later this summer.
“Inflation is very hard to bring back to target and I trusted the Bank of Canada when they said ‘we’re waiting to see if we’ve done enough’,” she said in an interview Tuesday. “But if the data comes in stronger than expected, it means you may not have done enough.”
For Clark, there’s plenty of reason to believe that at least one more raise will be needed at some point, and if that’s the case, the bank should do it as soon as possible.
“The argument for walking tomorrow instead of even waiting until July — it’s six weeks, maybe it doesn’t matter — but you really want to show that you want to bring inflation back to two percent, because a lot of this is based on where do people think inflation will be,” she said.
“You risk inflation expectations going up and then you risk never going back to 2 percent. People get used to 4 percent inflation[and]that’s a much more painful scenario.”
