Recent economic activity increased the chances of the Bank of Canada hiking its overnight rate by a minimum of .25% on June 7..April’s inflation rate increased by .1%, beyond all expectations of a decrease. Canada’s gross domestic product for the first quarter of 2023 was 3.1%, defying experts, and the bank, who predicted it would be 2.5%..Employment increased, as did consumer spending, and perhaps the biggest surprise of all was most housing markets reversed price decline trends over the last year, as buyers re-entered the market..The debate on what the bank will do is evenly split between a hold and the quarter-point rise, but one thing is certain, the rate will not be cut, with bank governor, Tiff Macklem, saying at a press conference last week the low-rate environment has been relegated to history..“Nobody should expect that interest rates are going to go back down to the very low levels that we’ve seen over the last decade or so,” Macklem said..“We’re in a transition period to a world where interest rates are going to be higher than what many people have gotten used to. That transition is going to take a while.”.Macklem’s comments were echoed by former Bank of Canada and Bank of England governor Mark Carney..“The long era of low inflation, suppressed volatility and easy financial conditions is ending,” Carney said. “It is being replaced by more challenging macro dynamics in which supply shocks are as important as demand shocks, increasing inflation, volatility, and interest rates.”.James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender doesn’t expect a rate increase on June 7, but won’t rule it out..“The bank had previously indicated [it] would hold the key overnight rate as long as things unfold the way they expected. Since their last announcement, two things have happened that don't align with their expectations. April inflation and Q1 economic growth, including consumer spending, came in higher than forecasted,” says Laird..“A rate hike is possible, but unlikely, next week. The bank will probably await future incoming data to see if inflation and economic growth re-aligns with their expectations before choosing to raise the rate further.”.Many lenders factored a possible bank increase into their mortgage rates, says Laird..“Because a rate hike is now a possibility, fixed rates have already increased,” he says. “Variable-rate holders who thought that rate hikes were over will be holding their breath to see if their rates are going to go up even further.”.“If the bank does choose to raise rates further, this will put downward pressure on home values and housing activity as spring turns to summer.”.Using Ratehub.ca mortgage payment calculator, Laird calculated how a .25% increase would affect mortgage payments, based on a homeowner who put a 10% down payment on a $462,086* home with a five-year variable rate of 5.3% amortized over 25 years (a total mortgage amount of: $428,769)..“That homeowner’s monthly payment is now $2,630. If the bank of announces a quarter point rate increase, their variable mortgage rate will increase to 5.8% and their monthly payment will increase to $2,693,” says Laird. “This means that the homeowner will pay $63 more per month or $756 per year on their mortgage payments."
