Canada’s central bank is increasingly feeling the pressure from inflation. Desjardins, the country’s largest cooperative financial group, accelerated its interest rate forecast. They see the Bank of Canada (BoC) hiking rates a quarter earlier than previously expected. Elevated inflation is what’s behind the change, and it’s going to push the cost of mortgages higher.
The Bank of Canada Is Forecast To Hike Rates 3-Months Early
Canada’s central bank will be forced to accelerate its overnight rate hike schedule. The BoC is now expected to increase rates by 25 basis points (bps) in July 2022. That would put rates at double today’s level, highlighting how low they are currently. Another similarly-sized hike is expected to follow in the fourth quarter.
Previously they didn’t see the rate normalization process beginning until October 2022. Now it has moved up a quarter, with an extra rate hike thrown in next year. The overnight rate is expected to end 2022 at triple today’s levels. Risk happens fast.
Canadian Mortgages Will Rise, Especially Shorter Terms
Desjardins is also raising their average posted mortgage rate forecast next year. The 1-year fixed rate forecast bumped up to an average of 3.00% for 2022. This is an increase of 20 bps from the previous forecast. Shorter-term rates are heavily influenced by the overnight rate, especially variable costs.
The 5-year fixed mortgage rate is also getting a bump in costs, but not as large. They now see an average rate of 5.10% for 2022, up 10 bps from the previous forecast. Yes, you might have noticed the hike is just half the size of the 1-year forecast. A 5-year fixed rate mortgage is more strongly influenced by the yield of Government bonds. Those are already on the rise.
Canadian Fixed Rate Mortgage Forecast
Desjardins’ forecast for the posted fixed-rate mortgage across Canada, for 1-year and 5 year terms.
Source: Desjardins; Better Dwelling.
Canadian Interest Rate Hikes Will Be Accelerated Due To Inflation
The sudden acceleration of the rate forecast is due to the economy, and inflation. Despite setbacks, they still see the economy on course for a quick recovery. Not even soaring inflation has been able to cool demand for goods. This indicates the economy is strong enough to handle a rate hike.
Speaking of inflation, it’s a huge problem — even if no one will admit it. Desjardins points to the 4.1% annual growth in CPI reported in August, the highest level since 2003. Their economists found 54.2% of the total CPI basket components are growing above the BoC’s 3% upper target. Escalated inflation is seen as passing eventually, but they warn risk is to the upside. That warning is strangely common these days.
Canada’s economy saw minor setbacks last quarter, but is still on course for a speedy recovery. Fears of the economy recovering too slowly are turning into fears of high inflation. For an institution to accelerate rate hikes here, inflation needs to be a bigger concern than growth. Reading between the lines, Canada is now very close to that point.
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People saying we can’t hike rates don’t realize the interest cuts were arbitrary. They cut before they knew how much stimulus they needed, not to facilitate it. When there’s record home sales and rock bottom rates during a “recession,” it’s not really a recession. It’s erosion of the public coffers by way of a print.
Instead of repeating “inflation is transitory,” more people need to repeat “the Bank of Canada has no clue what it’s doing, and this is a pension grift”
Yes.
Mortgage rates are negative in real terms during a period of record home sales and record home price growth. The incompetence here from the central bank is unprecedented, and clearly demonstrates the myth of central bank independence.
Not to say any other government would have done better, but a lack of political separation has never been more clear.
Couldn’t agree more. I’m bullish on real estate long-term, and if you have the time the odds of losing money are slim almost anywhere in Canada. But when you push stimulus to this extent, there will be consequences. I don’t even know if the payment holidays Canada is planning will help with the fallout to the extent they’re going to create.
Posted rate. Who cares?
The banks setting the discount, OSFI, credit capacities, people concerned about households losing their spending power on renewal, variable rate holders (which now exceeds regular rate mortgages), should I keep going?
The rate climb in 2017 is what triggered the correction. That’s why they were flooding mortgage markets in 2019. Home sales were on fire before the pandemic, people seem to have forgotten.
I think prices were declining, pre-pandemic… not exactly “on fire”
That’s right, but now everybody has the fomo in them and are okay with getting locked into 30 years slavery just so they can lay claim to a home.
The supply of money is more important than the supply of housing. There’s a bound on how much even the richest can pay, and higher rates mean fewer investors. This will be the only thing that can restore sanity to the market, so don’t tell the government before they try to “save” this area and prevent them from rising.
Not that they could if they tried, without blowing up everyone’s pension.
The supply of money will grow so long as provincial and federal governments decide to issue more bonds. The issuance of bonds is destroying the purchasing power of Canadians tomorrow and today.
If you increase the borrowing costs for businesses (i.e., costs of production) how is that going to make price increases slow down? And you’ll also be pumping more money through the interest income channel.
The inflation-interest rate story is completely backward on logic and historical evidence.
The businesses that don’t have “pricing power” (ie the demand for their product is highly elastic) will not be able to pass on the increases to customers.
Ones without efficient business models and sufficient access to capital will not survive. More efficient businesses will replace them or take their market share.
Sucks but there it is.
IFF the loonie is at serious risk the BoC will have to move to protect the currency or else you’re looking at failed state stuff.
Why not ask the supply chain executives who may know a thing or two about this (see link)?
BoC’s policy error (read over enthusiasm for saving the rich) caused 2022 demand to increase over 2019 by 10-20 %, while governments locked down supply. Central bankers won’t accept they made a mistake so they continue to parrot supply chain problems. Their transitory inflation narrative went down fast.
https://insider-voice.com/consumer-demand-must-be-reduced-to-end-supply-chain-crisis-says-maersk-executive/amp/
The article says the inflation is supply-chain driven. I don’t t know what your point is. The commentator’s recommend solution is depressing wages, that doesn’t mean that demand is the cause.
Regardless, if you look at the data, inflation tracks positively with interest rates: https://www.sciencedirect.com/science/article/pii/S0921800916307510
“Inflation is supply chain driven” but “that doesn’t mean that demand is the cause”?
The article I sent literally says this:
“We need to get down [consumer demand] growth to give the supply chain time to catch up, or to distribute growth differently. Over a long period of time, we will need to regain efficiency. “
You raise interest rates, demand goes down. Exactly the way it worked the other way round in the Covid crisis, rates were pulled down to stimulate demand per Central Bankers.
Now with respect to the article you’ve presented, it’s an academic opinion and not an accepted practice. You may like to brush up on these topics via an actual expert who also happens to be a Nobel Laureate:
Honest question: In Ontario, the annual amount by which you are able to increase someone’s rent is tied to annual inflation. If BoC figures inflation is transitory and due to supply chain issues (i.e. not real), shouldn’t that mean that landlords shouldn’t be able to increase rental amounts by a CPI number? Isn’t this just another way BoC is selling out anyone other than existing homeowners?
With the slowdown in China rates aren’t going up this fast. Desjardins is wrong. Until labour in the Far East rises above 50-60 per week, there’ll be no longer term sustained inflation!
The only way that impacts rates driven higher by inflation is if they taper their old demand faster than production, which isn’t going to happen. A forced rate hike in a recession is very different from a rate cut due to a global slowdown.
I just signed a five year fixed to start Dec first at 1.99 percent