While economists expect the bank to gradually raise interest rates by about half as much this year, there is a growing sense that the bank may need to start moving faster and more dramatically than expected to curb inflation, which is already at the highest level in a generation. Investment pricing known as exchanges suggests that the bank is likely to raise interest rates by half a percentage point when it meets in April, raising the benchmark interest rate to 1 percent. At central banks, attention is a virtue, so they like to move up and down slowly, by 25 points or a quarter of a percentage point at a time. Moving half a percentage point at a time is a sign that the bank may think it needs more aggressive action. The bank’s deputy governor said the same thing in a speech in San Francisco this week, telling attendees of a monetary policy conference that rising household debt was “worrying” and that the bank was “ready to act vigorously” to ensure that inflation will not run too hot for too long. “I expect the pace and magnitude of interest rate hikes … to be an active part of our discussions in our next decision,” said Sharon Kozicki.
How much and how fast
For Carlos Capistrán, a Bank of America economist, strong language like that of a central banker is a clear sign that “everything is on the table” when it comes to reducing inflation. This type of harsh discussion is the way banks say, “We will fight it really hard if necessary,” according to Capistrán. That’s why he raised his forecast for rates after Kozicki’s speech, to include not just one but three big increases in quick succession. It now forecasts that the central bank will increase by 50 points in each of its next three meetings in April, June and July and will follow those with lower ones next year until the bank interest rate reaches 3.25%. . That’s almost double the bank’s 1.75 percent rate before the pandemic, and you had to go back to 2008, before the financial crisis, to find the last time the interest rate was so high. For Capistrán, the reasons for speeding things up are obvious. “Inflation is quite high, the economy is really hot, the labor market is very hot in Canada and Canada. [U.S.] “The Fed is also going to increase by 50 basis points,” he said in an interview. “So there are a lot of reasons why it might be more aggressive than usual this time around.” The Bank of Canada has made it clear that it will raise its key interest rate in the coming months. But just how many times and how high is the multi-million dollar question for borrowers. (David Kawai / Bloomberg)
Fixed rate loans are not safe
Aggression may be what is needed right now, but borrowers risk being the collateral damage to the central bank’s emerging struggle for inflation. Floating rate loans are linked to the central bank rate and have risen in recent weeks, pending the bank’s move. Fixed-rate loans, meanwhile, are not affected by the central bank’s interest rate and are instead priced based on what happens in the bond market, but even there the market flashes red warning signs last month: interest rates are heading higher, faster . When borrowers take out a loan from a bank, they may assume that the lender has that kind of cash, but in reality they borrow it in the bond market and make a profit from the margin between the interest rate they pay to borrow money for themselves. , and the interest rate their customers charge when they lend it to things like mortgages. A large number of borrowers opt for five-year fixed-rate loans, which makes the five-year Canadian government bond the best representative of what can happen with fixed-rate loans, and the repayment of this debt has increased by more than one percent in March – an unprecedented leap into the stable world of bonds. The yield on five-year bonds topped 2.5 percent for the first time since the pandemic this week, pushing fixed mortgage rates well above 3 or even 4 percent in response. The Bank of Canada estimates that the average interest rate on a conventional mortgage loan at a major bank is currently 4.79 percent, and according to interest rate comparison sites rates.ca and ratehub.ca, it is not difficult to find a floating rate loan. right now for just over one percent. If Capistrán forecasts are correct and the Bank of Canada’s interest rate is set at 3.25, expect floating interest rates to make a similar leap. The impact can be dramatic. Right now, an unsecured 25-year mortgage of $ 400,000 at 1.5 percent would cost $ 1,599 a month. But if this variable interest rate rises to just four percent, where fixed interest rate loans already exist, the monthly payment jumps by more than $ 500 a month for the life of the loan. CLOCKS Many homeowners already have a thin line, according to a poll:
Most mortgage lenders walk the thin line as interest rates rise: poll
An Angus Reid poll found that 58 percent of homeowners say the cost of owning a home already outperforms other parts of their budget. 2:06
‘Soft landing’
That’s $ 500 less in every homeowner’s pocket to spend on other things, which is why the Bank of Canada is worried. “Raising mortgage rates will put a strain on spending,” Kozicki said in a statement, “and if enough of that slows down spending, it could affect the economy as a whole.” Finding the right balance between easing inflation without upsetting the economy is the job of the central bank, and economists have a clue as to what the best-case scenario is. “What the central bank is trying to do and what we all hope for is what we call a gentle landing,” Capistrán said. “To reduce inflation without creating a recession.” Andrew Husby, a Bloomberg economist, says the so-called soft landing the bank is trying to achieve is even more difficult because of the bank’s long-standing preference for raising and lowering interest rates. “If you are very predictable and very gradual and you only do it to be gradual and not for reasons of adjustment to economic conditions, this can be a problem and can create more inflation,” he said in an interview. Ultimately, this stated preference is because it is not among those who expect a larger-than-usual rate hike next week – a course it believes should be good enough to meet its long-term inflation target. “As we enter the second half of the year, we will see inflation begin to decline,” he said. “Not as much as the bank would like, but at least it went in the right direction.”
