Canada’s central bank is increasingly feeling the pressure from inflation. Desjardins, the country’s largest cooperative financial group, accelerated its interest rate forecast. They see the Bank of Canada (BoC) hiking rates a quarter earlier than previously expected. Elevated inflation is what’s behind the change, and it’s going to push the cost of mortgages higher.
The Bank of Canada Is Forecast To Hike Rates 3-Months Early
Canada’s central bank will be forced to accelerate its overnight rate hike schedule. The BoC is now expected to increase rates by 25 basis points (bps) in July 2022. That would put rates at double today’s level, highlighting how low they are currently. Another similarly-sized hike is expected to follow in the fourth quarter.
Previously they didn’t see the rate normalization process beginning until October 2022. Now it has moved up a quarter, with an extra rate hike thrown in next year. The overnight rate is expected to end 2022 at triple today’s levels. Risk happens fast.
Canadian Mortgages Will Rise, Especially Shorter Terms
Desjardins is also raising their average posted mortgage rate forecast next year. The 1-year fixed rate forecast bumped up to an average of 3.00% for 2022. This is an increase of 20 bps from the previous forecast. Shorter-term rates are heavily influenced by the overnight rate, especially variable costs.
The 5-year fixed mortgage rate is also getting a bump in costs, but not as large. They now see an average rate of 5.10% for 2022, up 10 bps from the previous forecast. Yes, you might have noticed the hike is just half the size of the 1-year forecast. A 5-year fixed rate mortgage is more strongly influenced by the yield of Government bonds. Those are already on the rise.
Canadian Fixed Rate Mortgage Forecast
Desjardins’ forecast for the posted fixed-rate mortgage across Canada, for 1-year and 5 year terms.
Source: Desjardins; Better Dwelling.
Canadian Interest Rate Hikes Will Be Accelerated Due To Inflation
The sudden acceleration of the rate forecast is due to the economy, and inflation. Despite setbacks, they still see the economy on course for a quick recovery. Not even soaring inflation has been able to cool demand for goods. This indicates the economy is strong enough to handle a rate hike.
Speaking of inflation, it’s a huge problem — even if no one will admit it. Desjardins points to the 4.1% annual growth in CPI reported in August, the highest level since 2003. Their economists found 54.2% of the total CPI basket components are growing above the BoC’s 3% upper target. Escalated inflation is seen as passing eventually, but they warn risk is to the upside. That warning is strangely common these days.
Canada’s economy saw minor setbacks last quarter, but is still on course for a speedy recovery. Fears of the economy recovering too slowly are turning into fears of high inflation. For an institution to accelerate rate hikes here, inflation needs to be a bigger concern than growth. Reading between the lines, Canada is now very close to that point.
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