“The Bank had been signaling the need for more rate hikes, but now it is debating whether it needs to hike rates further at all”: Economist
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Borrowing became even more expensive Wednesday as the Bank of Canada increased interest rates by .5 per cent as it continues to arm wrestle with persistent inflation.
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The move — the seventh increase this year — makes some mortgages, lines of credit, and some consumer loans more expensive for Canadians already pummeled by high prices.
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“Inflation is still too high and short-term inflation expectations remain elevated. The longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched,” the bank said.
That increase will be the latest to ripple through the economy.
“Point five is very painful for people who have variable rates,” said Leah Zlatkin, mortgage broker, with LowestRates.ca. “I think it’s going to be a really rough ride. I think it’s going to be a really rough ride for people with a home equity line of credit.”
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The central bank noted growth in the third quarter was stronger than expected, the economy continued to have excess demand, and the labour market remains tight.
But it also sees growth stalling: “Through the end of this year and the first half of next year.”
And that has some observers focusing on another line from the bank’s statement.
“Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target,” the bank noted.
Economists are weighing what might come next.
“Prior to today’s announcement, the Bank had been signaling the need for more rate hikes, but now it is debating whether it needs to hike rates further at all,” wrote James Orlando, Senior Economist, TD Economics. “We don’t think the BoC is done yet, but it is quickly approaching the end of its hiking cycle.
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“We expect the BoC will deliver its final rate hike in January, bringing the policy rate to 4.5%.”
Wrote Doug Porter, Chief Economist, BMO Economics, in a note to clients:“Today’s relatively aggressive hike suggests that the Bank remains acutely concerned about still-high inflation expectations, even amid a clear cooling in domestic demand.”
“We are more concerned than the consensus on the stickiness of underlying inflation, and suspect that the data will direct the way to one more 25 basis point hike at the next meeting.”
That means interest rate pain will sharpen in the new year.
“If people don’t smarten up and stop spending money, it’s going to continue,” said Zlatkin. “We are going to see another hike in January or February.”