The Bank of Canada’s move to hike its policy rate by 50 basis points Wednesday will be quickly noticed by variable-rate mortgage holders and Canadians holding a home equity line of credit, but if inflation persists and rates have to rise more quickly — something the central bank’s chief acknowledged was a possibility — the effects are not likely to stop there.
“Higher and faster rate hikes will affect mortgage affordability for a significant population of homebuyers,” RatesDotCA mortgage agent Sung Lee told the Financial Post in an e-mail. “Major banks have already pushed fixed rates higher several times over the past few weeks with some approaching the four per cent mark for uninsured products.”
The Royal Bank of Canada and Toronto-Dominion Bank were the first of the Big Six to react to the shifting interest rate environment, lifting their prime rates by 50 basis points to 3.20 per cent starting on Thursday, with Scotiabank and CIBC quickly following suit.
But the ripples from the rate increase could extend beyond mortgage carrying costs.
James Laird, co-founder of Ratehub.ca, noted that higher mortgage rates are expected to put downward pressure on home prices across the country. The national average price of a home reached $816,720 in February, according to figures from the Canadian Real Estate Association.
And here could be more pressure weighing on Canadian home owners as Bank of Canada Governor Tiff Macklem said he was prepared to get more aggressive with interest rate policy depending on how the economy recovers and how the outlook for inflation, which stood at a 30-year high of 5.7 per cent in February readings, evolves.
“If demand responds quickly to higher rates and inflationary pressures moderate, it may be appropriate to pause our tightening once we get closer to the neutral rate and take stock,” Macklem told reporters during a Wednesday press conference. “On the other hand, we may need to take rates modestly above neutral for a period to bring demand and supply back into balance and inflation back to target.”
The Bank of Canada estimates that a neutral rate stands between two per cent and three per cent. Macklem suggested the benchmark rate could rise above that range, potentially taking the overnight rate to 3.25 per cent.
