On October
26, the Bank of Canada continued its programme of quantitative tightening and
increased its goal for the overnight lending rate by 50 basis points to 3.75%.
The policy rate may also increase given the economy's ongoing demand pressures,
elevated inflation and inflation expectations, and other factors.
After the
announcement, the financial markets had already factored in at least another 25
to 50 basis points of interest rate increases through the third quarter of
2023.
The strength
of the worldwide recovery from the pandemic, supply chain disruptions, and
rising commodity prices resulting from the conflict in Ukraine are all factors
that the Bank acknowledges are contributing to the continued high and
widespread global inflation. As the strength of the U.S. dollar intensifies
inflationary pressures in many nations, financial stress has begun to rise in
several economies. The Bank anticipates a significant downturn in the global
economy in 2023 as a result of tighter global monetary policy.
The demand
for goods and services continues to outpace the economy's capacity to supply
them, according to the Bank, which is pushing up domestic inflation. The
Canadian economy continues to be characterised by excess demand and tight
labour markets. Despite the fact that job openings have decreased from their
peak, they are still numerous and firms continue to report significant labour
shortages. Due to this as well as the surplus demand brought on by the
economy's complete reopening following pandemic restrictions, prices for both
products and services have significantly increased.
The Bank
also noted that investment on huge purchases and housing, two sectors of the
economy that are sensitive to interest rates, are beginning to be affected. The
bank predicts that prices "are projected to continue to decrease,
particularly in those markets that saw bigger gains during the pandemic,"
and that "the reduction in residential investment that began in the second
quarter of the year will continue through the first half of 2023."
However, the Bank believes that it will take some time for the effects of higher
rates to realise. The Bank projects that the effects will stall later this year
and through the first half of 2023, declining from just over 3% in 2022 to just
under 1% in 2023, with a modest increase of 2% expected in 2024.
While the
Consumer Price Index (CPI) inflation rate decreased in September as a result of
lower gasoline prices, it is still well above the Bank's goal range and has
widened as nearly two-thirds of the CPI's components have had price increases
of more than 5% in the previous year. "Many Canadian families are
experiencing difficulties due to stretched household budgets and increased food
and housing costs." Inflation is anticipated to drop from over 7% in the
fourth quarter of 2022 to around 3% in late 2023 and return to 2% by the end of
2024 as the economy adjusts to higher interest rates, heightened commodity
prices, and supply chain disruptions.
The top
chartered banks in Canada are now offering exceptional interest rates on
five-year fixed mortgages that hover around 5.54%. Based on their creditworthiness
and the extent to which they conduct additional banking business with the
mortgage lender, home buyers can frequently negotiate the interest rate for
mortgage financing.
The
stress-test hurdle in the fixed rate & variable rate spaces is currently around
7.5% for new borrowers because the minimum qualifying rate for all mortgages is
the greater of the mortgage contract rate +2% or 5.25% as set by the Office of
the Superintendent of Financial Institutions & the Department of Finance.
Even if the mortgage is for less than five years, all mortgage applicants must
be eligible for financing based on an interest rate that is no lower than the
benchmark five-year lending rate.
The Bank of
Canada will next declare interest rates on December 7, 2022. On January 25,
2023, the Bank will release its next comprehensive update of its projections
for the economy, inflation, and projection risks.
Source By: CREA