On July 12, 2023, the Bank of Canada (BOC) raised its key benchmark interest rate to 5%, marking the second consecutive hike after a brief pause in March and April. The move was widely expected, and the BOC’s Governing Council stated that stronger-than-expected consumption and stubbornly tight labor markets drove inflationary pressures to remain persistent for services, warranting another increase in borrowing costs.

The Impact on Homeowners: Pre-Construction Condos and Homes

The BOC’s decision to raise interest rates to 5% has significant implications for homeowners across Canada, particularly those who are in the process of purchasing pre-construction condos or homes in new property developments. The increase in borrowing costs will make it more expensive for potential buyers to finance their purchases, potentially leading to a slowdown in the housing market.

The cost of borrowing will increase for Canadians with variable-rate mortgages, which may lead to higher debt-servicing charges, and pre-construction homebuyers who have not locked in their mortgage rates could face higher borrowing costs.

The Central Bank’s Inflation Forecast

The BOC’s new inflation forecast predicts that the slowdown in inflation will take longer than previously expected, hovering around the 3% mark for next year before easing to the 2% target in the middle of 2025. The central bank remains resolute in its commitment to restoring price stability for Canadians and will continue to assess the dynamics of core inflation and the outlook for CPI inflation.

The Resilient Canadian Economy

The BOC’s decision to raise interest rates comes as the Canadian economy continues to show surprising resilience, with stronger-than-expected consumption and tight labor markets contributing to inflationary pressures. As a result, the central bank has revised its economic growth forecast, now expecting 1.8% GDP growth in 2023, up from a previous forecast of 1.4%.

Balancing the Risks of Over and Under Tightening

Despite the strong performance of the Canadian economy, the BOC remains cautious about the risks of over-tightening monetary policy, which could lead to economic hardship for Canadians. Governor Tiff Macklem emphasized the importance of balancing the risks of over and under-tightening, stating that “if we don’t do enough now, we will likely have to do even more later. But if we do too much, we risk making economic conditions unnecessarily painful for everybody.”

The Need for Price Stability

The BOC’s decision to raise interest rates was driven by the need to restore price stability, particularly in the face of stubbornly high core inflation rates. Governor Macklem emphasized that getting inflation back to the 2% target could help shield Canadians against price shocks in the future.

The Path to Price Stability

The BOC’s commitment to price stability will require a delicate balancing act, with the central bank looking to slow spending and investment to reduce upward pressure on prices. Governor Macklem noted that “there is a path back to price stability while maintaining growth. So there is no recession.”

The Possibility of Further Interest Rate Hikes

While the BOC did not explicitly state that it was considering raising rates further in the future, it also did not rule out the possibility of additional hikes. The text simply said that Governing Council will continue to evaluate the need for further rate increases based on incoming data.

The Long-term Outlook for Interest Rates in Canada

According to Trading Economics global macro models and analysts’ expectations, Interest Rate in Canada is expected to be 5.25% by the end of this quarter. In the long-term, the Canada Interest Rate is projected to trend around 3.50% in 2024 and 3.00% in 2025, according to econometric models.

The Impact on Delinquency Rates for Household Debt

The BOC’s decision to raise interest rates could lead to an increase in delinquency rates for household debt, such as credit card debt and auto loans. While delinquency rates remain relatively low, the share of borrowers moving from 60 to 90+ days late on any credit product has risen and is now close to a historical high.

The Resilience of the Canadian Housing Market

Despite the BOC’s decision to raise interest rates, the Canadian housing market has shown resilience, with recent data suggesting a pickup in the housing market. While the Bank expects consumer spending to slow in response to the cumulative increase in interest rates, recent retail trade and other data suggest more persistent excess demand in the economy.

Conclusion

The BOC’s decision to raise its key benchmark interest rate to 5% has significant implications for homeowners, particularly those who are in the process of purchasing pre-construction condos or homes in new property developments. The increase in borrowing costs could lead to a slowdown in the housing market, and Canadians with variable-rate mortgages may face higher debt-servicing charges.

The central bank’s commitment to restoring price stability will require a delicate balancing act, with the BOC looking to slow spending and investment to reduce upward pressure on prices. While the BOC did not explicitly state that it was considering raising rates further in the future, it also did not rule out the possibility of additional hikes, and the long-term outlook for interest rates in Canada is projected to trend around 3.50% in 2024 and 3.00% in 2025 according to econometric models.