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Macklem has problems around every corner

Inflation hit 7.7% in May — its highest rate in nearly 40 years. Normally, the bank aims to keep inflation at a modest 2%.

May's figure was even higher than anticipated, which means Macklem’s main concern will be preventing high inflation from becoming entrenched.

It’s a difficult balancing act. The bank chose to keep rates close to zero for the first two years of the pandemic to help boost the economy, but creeping inflation forced it to act.

In March, it raised rates by 0.25%, and then by 0.50% in both April and June.

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How does this affect the economy?

Typically, analysts would worry these supersized hikes could push the country into a recession.

Moshe Lander, an economist with Montreal's Concordia University, says a hike of this size is not only a “depressing move” but could also “take some of the starch out of the Canadian economy in the process.”

Although Lander has reservations about such a big move, he can’t deny that inflation remains stubbornly high despite the bank’s best efforts these last few months.

“And so [the bank has] no choice but to go nuclear and go with that depressing increase,” says Lander.

The risks of such a hawkish move are worth taking, writes BMO's Porter.

“Recession calls have become mainstream for the broader economy,” Porter wrote in a recent note to clients. “But those rising risks simply cannot and will not sway the bank from soldiering on; the risk of recession has to be a secondary consideration to the reality of red-hot inflation.”

Canadian consumers will soon feel the heat

That reality has been hitting Canadians where it hurts — their wallets — for months now.

Unfortunately, while this month’s extra-large increase may finally help cool inflation, many Canadians will find their finances taking a hit elsewhere, especially with their debts. When the central bank raises its rates, the country’s lenders tend to follow suit.

Canadians are among the most indebted of all the world’s advanced economies. And while household wealth has surged through the pandemic, a report from RBC Economics shows close to 60% of that is simply due to rising real estate values.

The same report shows household debt sitting at record levels — again thanks to the “heated housing market,” which has “driven more mortgage borrowing.” Canadian borrowers are on the hook for an additional $300 billion compared to pre-pandemic debt levels.

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Homeowners beware

Anyone with a variable-rate loan should expect their rates to rise almost immediately. The Financial Consumer Agency of Canada offers some helpful examples of how this works.

Take someone who has a mortgage of $278,748 with a current interest rate of 3.1%, and 23 years left in their repayment period. Their monthly mortgage payment is currently $1,411, but even a 0.50% rate hike would bring it up to $1,483.

For every 0.50% increase, their mortgage costs them an extra $72 in interest every month.

When rate hikes hit 0.75% or higher, “of course as a private individual with a mortgage, I'm not too happy,” says Lander. “But at least I understand what the objective is, and you do what you have to do.”

Don’t expect relief in the near future

Part of why the past three rate increases haven’t had the effect economists were hoping for is that some aspects of what’s driving inflation are out of the bank’s control, like Russia’s war in Ukraine or supply chain issues.

Once the bank is able to relieve some pressure where it can, Lander says the rate hikes will stop. But that’s not likely to happen before the end of the year, considering that with every announcement, the bank has reminded us that it’s not done yet.

And Lander adds the bank has been pretty clear that consumers need to tighten their belts.

“I've seen more than one occasion where they've gone in front of an open mic and said, ‘Hey, Canadians … you need to get your debt levels under control,’” says Lander.

What can Canadians do to offset increased costs?

For most homeowners with variable-rate mortgages or HELOCs who aren’t overleveraged in their loans, Lander says some modest changes may be enough to make room to accommodate the increases.

That could look like opting for a staycation instead of a two-week jaunt in Europe this summer or trimming your household budget to find a few extra hundred dollars a month.

The government also recommends several measures to help prepare for future increases, like cutting back on your expenses, paying down your debts with the highest interest rates and finding other ways to increase your income.

“The Bank of Canada has given warnings,” says Lander. “And so there's time that Canadians can, at the margin, adjust their behaviour — and it doesn’t require the wholesale selling of your home.”

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