The latest on the Bank of Canada’s rate decision
MARK RENDELL
The Bank of Canada has raised its benchmark interest rate by by 0.5 percentage points, increasing Canadian borrowing costs for the sixth consecutive time this year while warning that economic growth will “stall” in the coming quarters.
This moves the policy rate to 3.75 per cent for the first time since early 2008. Financial markets had been anticipating a larger 0.75 percentage point rate hike. The central bank said that interest rates will likely need to rise further to get prices under control.
The bank also cut its forecast for Canadian economic growth. It now expects 0.9 per cent annual GDP growth next year, down from its previous estimate of 1.8 per cent. While it avoided using the word “recession” it said that “a couple quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth.”
Watch: BoC’s Tiff Macklem and Carolyn Rogers take questions
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Economists weigh in on the BoC’s rate hike
Here is how Bay Street analysts reacted in notes sent to their clients:
Royce Mendes, head of macro strategy at Desjardins Securities: “The fact that core inflation hasn’t slowed, inflation expectations remain elevated and demand is still outrunning supply, the Bank could have easily justified a larger rate hike. That said, the risk of such an aggressive move apparently outweighed the reward. As we’ve long said, the Canadian central bank needed to pivot before its U.S. counterpart as a result of the interest-rate sensitivity of the Canadian economy.”
Andrew Grantham, senior economist at CIBC Capital Markets: “The statement and downgraded growth forecasts within the [Monetary Policy Report] hint at an economy that is losing momentum maybe a little quicker than previously anticipated. Housing is seen to have retreated ‘sharply’ but there was also reference to consumer and business spending softening, as well as weaker international demand … Even with the weaker growth profile, the Bank stated that its preferred measures of inflation are not yet showing meaningful evidence of easing, and as such the statement still suggested that interest rates ‘will need to rise further.’”
Stephen Brown, senior Canada economist at Capital Economics: “After spending the last two months telling us that the only thing that matters for the policy outlook is core inflation, inflation expectations and the tightness of the labour market, the Bank dropped down to a 50 [basis point] hike today – despite elevated core inflation, inflation expectations and the tightness of the labour market.”
– Matt Lundy
How Bank of Canada’s rate hike is affecting the bond market
The Bank of Canada’s smaller-than-expected, 50-basis-point hike caused ripples in bond markets, not only in Canada but around the world. (A basis point is one hundredth of a percentage point.)
Bonds had adjusted somewhat for the possibility of a lower hike ahead of the announcement, with the two-year yield having dropped from 4.3 per cent on October 21 to the 4.1 level as today’s trading began.
The process continued in the wake of the news. The two-year bond yield dropped sharply to 3.91 per cent immediately before recovering slightly to 3.95.
The U.S. bond market, surprisingly, was also affected. The U.S. two-year yield fell from 4.44 per cent to 4.38 per cent after the Bank of Canada announcement. U.S. bond markets are interpreting today’s surprise as a potential sign that the Federal Reserve will follow the Bank of Canada and slow rate increases.
The loonie began its decline just ahead of 10:00 a.m. ET, falling a penny to US$0.73 where it remains as of 10:15 a.m.
Moving forward, it is likely that the Bank of Canada will need to see more concrete signs that higher borrowing costs are slowing the economy and inflation pressure before rate increases stop completely for the cycle.
Some data is slowing – the most recent reading of the S&P Manufacturing PMI indicated a contraction in activity – but most indicators remain inflationary. Retail sales for August grew at a 7- per-cent pace year over year, and for all of the talk of a housing slowdown, the average cost of a home is still up 8.3 per cent compared with September, 2021.
– Scott Barlow
BoC’s latest rate hike will be ‘negative for all borrowers’
Sherry Cooper, chief economist with Dominion Lending Centres, sums up the latest interest rate hike this way: “It will be negative for all borrowers.”
If you have a variable rate mortgage with static payments, a higher share of your mortgage payment will go toward interest and a smaller percentage will go toward the principal. If you have a variable rate mortgage where the payment adjusts when interest rates change, you will immediately face a higher monthly mortgage payment.
If you have a fixed rate mortgage, where the interest rate remains the same for the length of the mortgage contract, your monthly payments will remain the same for the duration of the loan. When it is time to renew your loan, the interest rate on the mortgage may be higher and you may pay more to borrow.
Before today’s rate increase, the average five-year fixed mortgage had an interest rate of 5.45 per cent, according to rate comparison web site Ratehub.ca. Meanwhile, the average five-year variable mortgage had an interest rate of 4.94 per cent, said Ratehub.ca.
For those who have a home equity line of credit, or HELOC, your interest payments will rise immediately. Some real estate experts are starting to report that borrowers are turning to HELOCs and alternative lenders to help cover the sharp rise in borrowing costs.
According to central bank data, more borrowers are withdrawing funds from their HELOCs. Withdrawal amounts have increased 2 per cent over the first two quarters of this year.
– Rachelle Younglai
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