The Bank of Canada's 'conditional pause' on interest rates may be over - so brace for another hike soon
There could be bad news for anyone with a mortgage this week, as speculation is growing that the Bank of Canada is getting ready to start raising lending rates again.
After hiking its benchmark interest rate repeatedly in a bid to rein in runaway inflation, the central bank hit pause on hikes in January, saying it needed time to gauge the impact on the economy.
That pause, though a strong indication the bank hoped the battle had been won, was anything but certain, as central bank governor Tiff Macklem made clear in a speech soon after the decision.
"This pause is conditional," he said. "It depends on whether the economy develops as we think it will and whether inflation continues to fall."
Since then, a number of data points have come out suggesting that those conditions are no longer being met, as Canada's economy is still running hotter than the central bank would like — perhaps even by enough to compel Macklem to step off the sidelines once again.
Economy is heating up
Canada's economy expanded at a 3.1 per cent annual pace in the first quarter, Statistics Canada said last week. That's far more than what the central bank was forecasting when it took its foot off the brake.
That stronger than expected GDP number came on the heels of inflation data for March that showed the country's inflation rate inched up in April to 4.4 per cent. That was a reversal after nine straight monthly declines.
Stronger than expected output and an inflation suddenly trending in the wrong direction would ordinarily be the sort of thing that might compel a central bank to step in and cool things down.
Investors certainly seem to think there's a chance. Trading in investments known as swaps, which bet on future central bank rates, imply there's about a 40 per cent chance of a small hike in the central bank's rate on Wednesday, taking it to 4.75 per cent.
That's bad news for anyone with a mortgage, as lending rates that have also soared this year will be poised to go even higher.
Ron Butler, a Toronto-based mortgage broker, says variable rate mortgages have borne the brunt of the damage from rate hikes so far, and if the central bank decides more are needed, the impact would be dramatic and immediate.
"In many ways, for the people with variable rates it could … be the last straw and force them to have to take really drastic action," he said in an interview.
Despite the dramatic rise in lending rates so far, only a small percentage of borrowers have actually felt their payments increase, since fixed rate borrowers tend to lock in for several years at a time, and even most variable rate loans have fixed payments that simply add years to the loan instead of increasing the payment when rates rise.
Regardless of what the central bank does this week, the market has moved into a new normal of higher rates, and it's a slow moving wave that will keep hitting people as they renew or buy for years to come.
"There's going to be no more 2.49 rates, no more 2.99 rates," he said. "Maybe a rate that starts with a three but mostly a rate that starts with a four will become the new normal for people, and it will be really hard for Canadians to afford houses in the major cities."
Butler says the cost of carrying a $500,000 mortgage has already gone up by $1,131 a month in the current cycle — and that's before any more raises that may come this week.
"That's a significant impact on anybody," he said. "Their payments are big and in one or two years they're going to be faced with, who knows, hopefully a lower rate, but perhaps even a higher rate."
That's the exact scenario that homeowner Steven Lawrence was hoping to avoid.
Lawrence and his husband have owned a two-bedroom condo in Vancouver for almost a decade, on a fixed rate loan charging 2.8 per cent. But that loan was up for renewal at the end of May, a major source of anxiety in the home as the pair were faced with rates of six per cent and above in some cases.
They ended up locking in at a rate of just over 4.8 per cent for three years, a loan that will cost them an extra $856 every month. With a two year old's child-care bills to pay for, Lawrence says their mortgage will gobble up every cent of wiggle room they got from the introduction of subsidized daycare earlier this year, but it was worth it for the peace of mind.
"It's definitely not ideal, but it's … doable," he told CBC News in an interview. "I mean, I'd prefer $850 to be going to vacations or stuff for my baby [but] at least I don't have to watch if an interest rate hike happens."
"I'm sure there's millions of other Canadians that are in the same boat or or are going to be in the same boat over the next coming years if interest rates stay this high."
If not now, then soon
The consensus among economists is that the bank will not raise this week, but even those who don't think one is coming this week agree there's likely to be another one at some point this year.
Veronica Clark was the first major economist to call for a rate hike, a position that has slowly been joined by a handful of others. For her, the rationale is simple: the conditions that the Bank of Canada laid out for pausing are no longer being met.
"Inflation is a really hard thing to bring back to target and I trusted the Bank of Canada when they were saying '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, that means maybe you haven't done enough."
To Clark, there's ample reason to think at least one more hike will be needed at some point, and if that's the case, it behooves the bank to do it sooner rather than later.
"The argument for hiking tomorrow as opposed to even waiting until July — it's six weeks, maybe it doesn't matter — but you really do want to show your commitment to getting inflation back to two per cent because a lot of this is based on where do people think inflation will be," she said.
"You're risking inflation expectations going up and then you're risking not ever getting back to two per cent, people getting used to four per cent inflation [and] that's a much more painful scenario."
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