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Saturday, August 13, 2022

As long as inflation remains high, the Bank of Canada is likely to raise interest rates

As long as inflation remains high, the Bank of Canada is projected to raise rates.

Key Takeaways:

  • Experts believe that the Bank of Canada will announce another significant interest rate hike on Wednesday, as it strives to rein in spiralling inflation.
  • Statistics Canada recently stated that the consumer price index in Canada increased 6.8% in April compared to the same month a year ago.

The Bank of Canada is predicted to declare another hefty interest rate hike on Wednesday, according to experts, as it attempts to rein in spiralling inflation.

After maintaining its benchmark interest rate around zero since March 2020, the central bank announced two rate hikes in March – April, the second-highest in 22 years at half a percentage point.

The overnight rate is forecast to rise by a half-percentage point to 1.5 percent this week, “with more rises likely in the months ahead,” according to Nathan Janzen, assistant chief economist at the Royal Bank of Canada.

The actions are part of an effort to combat inflation, which has been at its highest level since the early 1990s.

Experts also believe that strong economic growth and unemployment near multi-decade lows allow the Bank of Canada’s governing council to aim for a slowdown.

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According to Stephen Tapp, senior economist at the Canadian Chamber of Commerce, growing input prices are one of the most significant challenges confronting businesses, causing price hikes and an urgent need to maintain interest rates on the rise.

“These cost pressures would continue to fuel inflation, putting even more pressure on the Bank of Canada to raise interest rates at a breakneck speed to keep inflation under control,” he said in a Monday statement.

Statistics Canada announced earlier this month that the consumer price index in Canada jumped 6.8% in April compared to the same month a year ago. Groceries increased by 9.7% since September 1981, while gasoline costs increased by 36.3 percent year over year.

In a note to clients on Monday, Desjardins’ head of macro strategy, Royce Mendes, said, “Canadian inflation is moving more than three times faster than objective.”

“In reality, with the policy rate still low, a hike of more than 50 basis points could easily have been justified.” On the other hand, Officials have previously stated that a 75-basis-point raise is “too much for them” for reasons that aren’t entirely obvious.

The increased benchmark interest rate has already forced Canada’s main banks to hike their prime rates, raising the cost of benchmark-linked loans, such as variable-rate mortgages.

RBC, TD Bank, CIBC, BMO, Scotiabank, and National Bank announced last month that they would hike their prime rates by half a % to 3.20 percent from 2.70 percent.

As long as inflation remains high, the Bank of Canada is projected to raise rates.
As long as inflation remains high, the Bank of Canada is projected to raise rates. Image from Al Jazeera

“Consumers with variable-rate mortgages should expect to pay a little extra on their mortgage payments,” said Leah Zlatkin, a mortgage specialist at LowestRates.ca.

She advises that those who have already been pre-approved should examine if they can still pass the mortgage stress test. The test, which the federal Liberal administration introduced in 2018, compels would-be buyers to demonstrate that they can afford to cover their mortgage rate plus 2 percentage points or 5.25 percent, whichever is higher.

“You want to start contemplating whether this is going to affect your ability to stress test at the same level if you’re looking at a flexible rate and also you’ve been pre-approved at a rate that’s on the higher end – something close to 2.8 percent,” Zlatkin said in a phone interview.

However, if house prices continue to fall, buyers may be able to purchase the same property they would have qualified for a few months ago while paying a higher interest rate. “You’re paying more interest, but you’re paying less for the house.”

Meanwhile, fixed rates have risen from 1.75 to 2%, according to James Laird, co-founder of Ratehub.ca, as well as president of CanWise Financial, a mortgage agency.

“With rate hikes on the horizon, many Canadians are opting to switch from a variable to a fixed rate.” However, some people continue with the variable rate since it is still so much lower than fixed rates today, and it has traditionally provided better long-term savings,” Laird said last week.

Source: CTV News

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