BoC interest rate hike will have a 'dramatic effect' on Canadians, especially homeowners: economist

The Bank of Canada’s aggressive one per cent rate increase on Wednesday caught many by surprise and will likely have a considerable financial impact for many Canadians, says one economist.

“It’s going to have an immediate, pretty dramatic effect on a lot of people’s borrowing costs,” Stephen Brown, senior Canada economist at Capital Economics, told CTV’s Your Morning on Thursday.

“The bank is telling us it is going to do whatever it takes to get inflation back down again.”

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Most economists had expected an already-hefty 75 basis point move. However, the jump to 2.5 per cent from 1.5 per cent is the largest single increase by the central bank since 1998 and the fourth hike this year. Yet the bank has made it clear it’s not done.

Earlier polls suggested economists were expecting a 50 basis point increase in September. Brown is predicting a 75 basis point hike, followed by another quarter per cent in October, for a total of another one percentage point increase before the Bank of Canada holds.

Brown added the Bank of Canada’s “whatever it takes” warning includes risking a downturn in the economy.

There are already concerns that soaring interest rates could drive the country into a recession, but most economists have said the bank has few other options to quickly tame soaring inflation.

The annual inflation rate surged to 7.7 per cent in Canada in May, the highest it’s been since 1983 and far exceeding the Bank of Canada’s two per cent target. While the central bank is predicting inflation will peak at 8 per cent in the coming months, Capital Economics is forecasting a peak of 8.3 per cent.

Last week, Royal Bank of Canada predicted that the country was headed towards a moderate and short-lived recession.

Still, there are “encouraging signs” globally in regards to decreasing inflation, Brown said, with some commodity prices beginning to cool and global shipping rates falling sharply.

“We should see some goods prices start to ease up now in the coming months,” he said.

NEW HOMEOWNER WOES

One sector seeing a significant impact from the rate hikes is the housing market. Average housing prices have already fallen dramatically since April and the Canadian Housing and Mortgage Corporation is expecting the market to decline 3.5 per cent overall, with some forecasters predicting a steeper plunge of up to 20 per cent.

Capital Economics is among the forecasters predicting a 20 per cent dive.

“[It’s] in part a reflection of just how incredible the gains were over the past year,” Brown said.

House price inflation at the moment is running around 25 to 30 per cent, depending on which measure you look at, Brown said, so the 20 per cent prediction only wipes out one year’s worth of gains.

Variable mortgage holders will take the biggest hit, but Brown does not expect the bank to raise the interest rate past 3.5 per cent.

”I just think given the rise in mortgage rates that we’re seeing, further upward pressure on interest rates, it’s very likely we’re going to see further falls in house prices,” Brown said.

“It’s pretty unlikely that the bank’s going to go any further than that much, just because of the pretty significant downside risk to the housing market at that stage.”

MORTGAGE PAYMENTS ON THE RISE

New homeowner Youseff Shehata knew interest rates would be going up when he was looking to purchase a home, but was still surprised by the Bank of Canada’s aggressive move this week. He has seen his mortgage payments increase by about $300 a month since making his condo purchase in Toronto in March, he said.

“When I bought my condo downtown, I did the math and I did a buffer because I knew that it might go up a little bit, but I never expected to be that much,” he told CTV News Channel on Thursday. He added that it has been disappointing to see his mortgage payments increasing month after month.

Shehata said it is too late to consider reselling because he cannot guarantee he will be able to sell the condo for the price he paid. On the other hand, he says his friends have seen their rent increase dramatically as well.

“Now with interest rates going up, it’s very hard for people to buy, it’s hard for me to sell. So I think I’m in a very tough situation…even if I didn’t buy in the first place – still, the rental market is crazy.”

Throwing another curve into his budgeting plans was the jump in his living expenses like groceries. He is cutting some of his discretionary spending, eating out less, and has also asked his cleaner to stop coming. That was a difficult decision, Shehata said, knowing that she too had to deal with increasing living expenses as well.

“Inflation has been … crazy over the past few months and now I have to redo all the calculations and redo the math all over again,” he said.