Bank of Canada to Announce Increase in Key Rate: Another Blow Ahead for Borrowers?

Another blow ahead for borrowers?

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As a growing number of households are taken by the throat, the Bank of Canada will announce on Wednesday whether it will increase its key rate again, and thus mortgages and other debts.

“I have plenty of clients who have mortgages to renew in October and November. They are already calling me and are in a panic. Imagine if rates go up again on Wednesday!” says Stéphane Bruyère, mortgage broker with Mortgage Architects.

This broker in the Quebec region is having more and more difficulty qualifying clients for loans. “I have clients who have mortgages at 3.29% and who will soon find themselves with a rate of 5.29%. They don’t find it funny. That’s almost $300 more as a monthly payment,” he says.

Right now, three-year fixed mortgage rates below 5% are almost all gone, he adds. “Everything went up. Below 5 percent, it’s very hard to find in the landline.”

Another turn of the screw?

Will the Bank of Canada give another push on Wednesday to continue fighting inflation? Experts’ opinions differ, but the consequences of an increase—increase in variable rate mortgage payments, increase in the cost of renewing mortgages, lines of credit and even certain credit cards—will not be long in coming. .

For Jimmy Jean, chief economist and strategist at Desjardins, the Bank of Canada should raise its key rate… but only in July.

“Taking into account the data, in particular the rebound in hourly wage growth and the increase in property sales, an increase as of next week seems justified”, he wrote on this subject Friday, on the site of Gardens. “(But) we consider a rise from July to be more likely for a variety of reasons. Investors are still leaning towards the status quo at next Wednesday’s meeting. Surprising the markets with a rate hike could spark speculation about future decisions and result in a more pronounced tightening of financial conditions than the Bank of Canada wants at this time,” he added.

Banking crisis

“We experienced a small banking crisis in the United States recently. Two banks have failed and market credit has tightened, even here in Canada. Raising rates now would risk creating a shock in the market and amplifying the lack of liquidity,” explains Valeri Sokolovski, associate professor in the finance department at HEC Montréal.

“The economy must be given time to absorb negative shocks. This is why I rather expect a rate hike in July, when the situation will be clearer,” he adds.

“Time bomb”

The real estate market is increasingly vulnerable to rising interest rates. On May 25, economists Royce Mendes and Tiago Figueiredo, from Desjardins, warned against the “ticking time bomb” represented by variable rate mortgages.

“When renewing their mortgage, many borrowers will face a significant increase in their monthly payments – up to 40% in some cases. While about three-quarters of variable-rate and fixed-payment mortgages have reached their rate limit, many borrowers are not required to make additional payments on their loan. But the sums due will sooner or later have to be repaid. The question is whether this is a ticking time bomb that will explode in a few years,” they wrote.

Seven increases in one year

Recall that in 2022, the bank raised its interest rate seven times. Then, in January 2023, another hike followed, bringing the key rate to 4.5%.

Inflation meanwhile rose 4.4% year over year in April, according to Statistics Canada. The figure is higher than the 4.1% expected by economists.

CHANGES IN THE KEY RATE

• Mars 2022 : +0,25 | 0,50%
• Avril 2022 : +0,50 | 1,00%
• June 2022: +0,50 | 1,50%
• July 2022: +1,00 | 2,50%
• September 2022: +0,75 | 3,25%
• October 2022: +0,50 | 3,75%
• December 2022: +0,50 | 4,25%
• January 2023: +0,25 | 4,50%
• March 2023 : (status quo) | 4,50%
• April 2023: (status quo) | 4,50%
• June 2023: coming Wednesday