Bank of Canada Rate Hike

The first rate hike since 2018 has been introduced in March 2022, and it is being predicted that another rate hike could be announced again soon. Previously, the rates were increased from a record low of 0.25% to 0.50%, however, considering the geopolitical issue between Russia and Ukraine, another Bank of Canada rare hike could happen in April.

Doug Porter, chief economist and managing director of BMO Financial Group highlighted that a further quarter-point raise could be seen in each of the Bank’s next two rate announcements. He added, “Historically, the Bank of Canada has not tended to fool around once they start raising interest rates. They tend to go on a series of moves when they decide it’s time to start moving on rates, and I didn’t get the sense that they were going to change from that pattern this time either,”.

Another rate hike by Bank of Canada could be seen as soon as April and the rate would further be increased in the next meeting. Further clarity is required on the situation of Ukraine and Russia as this will be a determining factor for the interest rate hikes by the Bank of Canada. Although the invasion of Russia into Ukraine is a major source of uncertainty, the Bank’s announcement of rate hike was predictable. This is because the previous rate hike was heavily telegraphed to the citizens in their January statement.

The Bank of Canada also highlighted that because of the invasion of Ukraine, there would be further increase in inflation in the country and would also affect other parts of Canada’s economy. Furthermore, the price of commodities like fertilizer, natural gas and oil have skyrocketed because the country is a major producer of the mentioned items.

Slowdown in Housing Purchases?

Although there was a quarter-point rate increase in March, the housing market is still running hot and the impact of another rate hike in April would be mild. Analysts have highlighted that to have a cooling effect on the real estate market, consecutive rate hikes are required. However, this would be unlikely as each point increase would have an effect on the financial stability of many Canadians.

Doug Porter said, “Our general working assumption is that it takes about 100 basis points of rate hikes to make a serious impact on the housing market. Having said that, we’ve just had such scorching numbers over the past year [that] it’s tough to believe that anything close to that pace can be maintained,”.

As such to meet the supply and demand in the housing market, it is essential that a gradual increase in interest rates allow for moderation in the housing market and the level of sales. However, the same cannot be said for the house prices as they are likely to further increase, making it potentially difficult for some to purchase a new home.

Since January, housing prices have increased by 25-30% which is a steep increase in price. This makes it difficult to predict that the average price of a home would remain constant in the future, let alone decreasing the price.