The Bank of Canada recently raised interest rates from 0.5% to 4.25%. Economists were split between a 25 or 50 basis point increase. Canada’s central bank has raised its rate seven times this year in its fight against soaring inflation. These rate hikes have significantly impacted the rates that Canadian consumers and businesses get from their banks on things like savings accounts and mortgages. We outline five things you need to know about the rate hikes.
1. The central bank is flashing amber. It has implied they may pause with a wait-and-see mentality before the following rate announcement on January 25, 2023. While they did not close the door on further rate hikes, we are likely closer to the end of the tightening cycle.
2. The stickiness of inflation and the strength of the labour market continue to be top of mind for the Bank of Canada. While wage growth increased and unemployment rates reached a record low in June, tightness in the labour market continues to lead to an imbalance between supply and demand. Additionally, inflation hit a 40-year peak in June at 8.1 percent. While it eased to 6.9 percent in September, October did not see any change.
3. Economic growth will likely stall in the coming quarters as the Bank of Canada tries to cool inflation. The next debate is how much pain will be needed with these higher rates to get inflation back down. Higher rates impact both individuals and businesses and have historically led to slower overall economic activity, which in turn leads to higher unemployment and economic uncertainty.
4. This could result in increased borrowing costs.
- An increase in mortgage rates has led to sales cooling off in a hot residential market. Those with variable rate mortgages will feel the pain of higher monthly payments immediately, while borrowers with fixed mortgages maturing will eventually have to refinance at a much higher rate.
- National Bank just came out and said that borrowers who buy a new residence cannot transfer their existing lower-cost mortgage.
5. It is a good time to be a saver. Increasing rates means higher savings rates and GICs, which were at historic lows from 2020 to 2021. Fixed Income Funds, like bonds, preferred shares, mortgages and private debt, have exposure to variable rate debt, meaning they benefit from an increase in rates on variable rate investments.
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. All investments contain risk and may gain or lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required securities commissions.
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