Experts expect up to six interest rate hikes this year
Bank of Canada will try to cool housing market, a key factor for inflation
Interest rate hikes are on the horizon as inflation in Canada continues to soar.
Experts say consumers can expect a slight cooling in the real estate market, continuing high prices for food and other products, and possibly higher wages as well.
The annual pace of inflation climbed to a three-decade high in December 2021, according to Statistics Canada, hitting 4.8 per cent compared to the previous year. The steep rise is driven in part by the higher costs of real estate, food and passenger vehicles. And, as 2022 unfolds, economists say it’s not over yet.
The Bank of Canada is expected to make an announcement next week. And economists are predicting a series of interest rate hikes in the coming year as the bank tries to cool inflation. Some traders are betting on up to six.
TD senior economist James Orlando said TD’s official call this year is for four rate hikes, though the markets are pricing for five or six. Four hikes would bring the Bank of Canada’s interest rates to 1.5 per cent.
“The Bank of Canada is … a little bit behind the curve when it comes to inflation, but they’re going to hike really aggressively,” he said.
TD expects an early rate hike, said Orlando, so that the Bank of Canada can ease them in as much as possible.
One of the main intents of the rate hikes will be to cool Canada’s housing market, which has been fuelled in part by dirt-cheap mortgages, Orlando said.
Canada can’t afford to have the current price growth continue unchecked, he said.
“That creates a lot of risk to the financial system in Canada, and the Bank of Canada doesn’t want those risks to be building any further.”
By the end of 2022, Orlando predicts there won’t be any cheap mortgages available. Those who have chosen a variable rate may want to lock in to a fixed rate if they’re able, he said, otherwise they should expect to pay more as the year wears on, affecting their spending power.
David Macdonald, senior economist with the Canadian Centre for Policy Alternatives, said though the housing market isn’t technically in the Bank of Canada’s purview, inflation is, and housing has been a major driver of inflation over the past year.
Raising interest rates will make the carrying cost, or the monthly cost, of a mortgage higher in the short term, said Macdonald. That could in turn moderate the increase in house prices. If this shift is big enough to deter investors from the housing market, houses could actually become cheaper, eventually lowering the carrying costs of a mortgage even as interest rates rise, he said.
“This may well be a good move for consumers,” Macdonald said.
RBC senior economist Josh Nye said the impact of impending rate hikes is already being seen in longer-term bond yields and mortgage rates.
“Five-year fixed-rate mortgages have started to creep up and we think that’s going to continue and perhaps accelerate a bit once the bank starts raising interest rates,” he said.
“In absolute terms, we’ll still be talking about a pretty strong housing market in 2022,” added Nye, but “not nearly the pace of home sales that we saw in 2021.”
Pedro Antunes, chief economist at the Conference Board of Canada, said a correction in Canada’s housing market is in the future, though it’s not clear when that will happen.
“I don’t know that the housing markets are really supported by the demographics and the fundamentals here,” he said.
The Conference Board is looking at three rate hikes this year in Canada, said Antunes, with more in the United States.
December was likely the peak of headline inflation, said Nye, as some of the biggest economic stresses will likely be alleviated, but other drivers of inflation are on the horizon, such as wage growth.
Price increases will continue in 2022, driven by real estate, food and passenger vehicles, Orlando said. Though inflation may not stay close to five per cent, he doesn’t see it coming near to the bank’s two per cent target anytime soon.
However, while prices are set to continue rising, so are wages. The rise in inflation has not been matched by wage growth so far, Orlando said, but with the current hot labour market, workers have bargaining power and may see their wages go up in 2022 as a result.
One of the goals of raising interest rates is actually to slow wage growth, in an attempt to, in turn, slow down rising prices, Macdonald said.
This is one of the trade-offs of cooling inflation, he said, adding at least in the short term, some consumers and some business owners may feel the squeeze.
“The higher interest rates come at a direct cost to some people.”