Higher rates weren’t enough to kill Canada’s economy—they only made it angry. The Bank of Canada (BoC) surprised the market with a rate hike last week, and BMO doesn’t think it was the last one. Canada’s economy is running so hot, the market now expects at least two more rate hikes. It’ll almost certainly lead to higher mortgage rates, which will throttle demand for housing at these prices. That’s not just a coincidence.
Canada’s Key Interest Rate Is The Highest Since 2001
Canada saw its key interest get an unexpected hike last week. The BoC raised the overnight rate 25 basis points to 4.75%—the highest level since 2001, back when rates were being cut to deal with the tech bubble bursting. It was such a surprise, it also helped send the Government 5 year bond over 20 basis points higher.
“The market was pricing only 50% odds of a hike ahead of the latest decision, contributing to the sharp bond market move,” Benjamin Reitzes, Canadian Rates & Macro Strategists.
Adding, “Another 25 bp hike in July appears likely in our view given the BoC’s hawkish tone and limited data points until that meeting.”
Canada Expected To Get At Least Two More Rate Hikes
Canada’s stronger-than-expected economy is behind rising expectations for the overnight rate. Rising rates were supposed to throttle demand for goods, but there’s been few signs its cooling the economy. Core inflation remains elevated, employment is near a record, and GDP is rising at a rate that would rival the best of times. A rising overnight rate had little impact on the country, with the exception in the number of doomsday pieces in the news.
In fact, the economy is running so hot that the market sees hikes beyond the July move. “The market agrees with our view and is pricing another 35-40 bps in tightening by year-end,” said Reitzes.
Canadian Mortgages Are About To Get More Expensive
A higher overnight rate is bad news for mortgage borrowers looking for more leverage. “As of late Wednesday afternoon, Canada 2-year yields surged over 20 bps to around 4.60%, the highest level in 16 years,” he notes.
“With 5-year yields also popping about 20 bps higher, mortgage rates could soon climb as well. That would dampen building momentum in housing, something the BoC probably won’t mind seeing.”