Rate hikes put a storm cloud on political horizon
Mounting pressure on consumers may hurt Liberals, experts warn Bank of Canada governor Stephen Poloz said hikes will prevent the economy from “overheating”.
OTTAWA— The Bank of Canada has raised its key interest rate and opened the door to sooner-than-expected hikes in the future, crimping affordability and putting a storm cloud on the political horizon.
Wednesday’s increase — and the promise of more to come — comes on top of more restrictive rules around mortgage lending and will begin to hit potential homeowners, according to Benjamin Tal, deputy chief economist at CIBC.
“Clearly for young Canadians, affordability is becoming an issue,” Tal said. “It’s not at a point that will break the consumer’s back but clearly higher interest rates are starting to impact.”
Because interest rates have been so low for so long, “every basis point counts,” Tal said, adding that a small increase is “very significant.”
The central bank on Wednesday raised its overnight rate by a quarter point to1.75 per cent, its highest point in almost a decade. The bank announcement set in motion rate hikes across banks and other lenders. The Bank of Montreal for example, raised its prime lending rate to 3.95 per cent.
Sal Guatieri, director and senior economist at the Bank of Montreal, said rate increases this year have already “knocked quite a number of buyers out of the market.”
He said the effect will be most pronounced in Toronto and Vancouver, where soaring housing prices have already made it tough for first-time home buyers.
“The only affordable options for most families in Toronto are condos,” Guatieri said. But even there, the median-income family is spending one-third of its salaries on mortgage payments, up from 19 per cent in 2005, he said.
He said the good news is that interest rates are still low and not expected to rise dramatically over the next 18 months.
Still, worsening affordability and rising interest costs could pose political problems in what is an election year, said Darrell Bricker, CEO of Ipsos Public Affairs, who took to Twitter to warn that rate hikes are a “sleeping killer for governments.
“Not as glamorous as other things governments like to talk about. But, the impact on the affordability for everyday people is immediate and devastat- ing,” Bricker said on social media.
In an interview, Bricker said that issues around affordability and personal finance, such as taxes and housing, are top priorities for Canadians. And while the Bank of Canada operates independently of the federal government, affordability woes caused by rate hikes could put voters in a cranky mood.
“As interest rates are going up, it creates a bit of an issue given that’s what people are concerned about,” Bricker said.
“If they’re going to claim that happy days are here again and things are going great and interest rates are going up and people are really feeling it ... it’s a problem,” he said of the Liberals. On Wednesday, the bank pointedly stopped characterizing future increases as “gradual,” setting the stage for hikes to come sooner than expected. It wants to bring the rate into a “neutral” range of 2.5 per cent to 3.5 per cent in order to keep a check on inflation. Bank of Canada governor Stephen Poloz acknowledged that the higher rates could mean hardships.
“It can be difficult for some but the reality is that the economy is running at its capacity and is no longer needing stimulus,” Poloz said.
The bank said Canadians have been adjusting well to rate hikes but it will continue to assess how households are handling the higher costs as they evaluate future increases. It added that new rules meant to dampen speculation have actually improved affordability by curbing double-digit price increases and bidding wars.
“Housing markets seem to stabilizing and at a lower level and probably a more sustainable level,” said Carolyn Wilkins, senior deputy governor of the Bank of Canada.