Where the impact will be felt the most
The Bank of Canada’s target overnight policy rate affects the interest you pay from lenders like banks. The higher the overnight rate, the more interest you’ll pay.
“People who have a mortgage, and if you're looking to renew your mortgage, it's going to impact you,” says Charbonneau, adding that lines of credit and variable-rate mortgages are affected the most.
The increase of 0.75 means that for some variable-rate mortgages more of the money you pay each month will be going to interest rather than the principal. And if your trigger rate is reached, you can anticipate higher monthly costs.
With mortgage rates rising, it also makes trying to purchase a new home even more difficult. “We spoke to our mortgage broker a couple of days ago,” says Small, “and he's unsure if we can carry [our existing mortgage], which just adds all the stress to knowing what we can afford.”
Charbonneau states that the Bank’s raising the interest rate is to produce “a restrictive stance of monetary policy, which means over 3%.”
At this point, “the economy should be growing below potential. It would be a long period of slow growth, which should be sufficient to cool inflation,” says Charbonneau.
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Living with the rate hike
The higher cost of living has affected everyone, and changed the way each of us interact with our money.
Avery Shenfeld, managing director and chief economist at CIBC states that “anyone financing expenditures with debt, or facing a mortgage coming up for renewal, should be leaving room in their budgeting for still higher interest rates ahead.”
“We're more aware of inflation,“ says Small, “and trying to navigate that is something we consider with every purchase.”
“Before we could say ‘why not?’ and indulge in nights out. Now we find ourselves saying ‘do we care enough?’ before making any decision.”
For an economic course correction to be successful, the higher interest rates will be with us for a while.
“It's painful,” says Charbonneau, “but it's part of the process. Otherwise, we get into a much worse situation.”
When will the rate hikes end
The good news is that, in Charbonneau’s eyes, the rate hikes will end soon.
She expects that rates will hold at 3.25% for a long time, with no cuts anticipated next year.
“We know that there's a lot of talk of recessions coming. That's not part of our forecasts, at least not for now.”
“By the time October comes around, the data will suggest that [the Bank of Canada] can take a pause.”
However, some factors that affect inflation are out of the government’s control. Charbonneau observes “we need certain global factors to help us… if that doesn't happen, there are a number of scenarios where you could think that interest rate would need to go higher.”
Trade between nations, world economies and international politics such as the war in Ukraine all play factors when it comes to determining how long inflation will rise.
Charbonneau observes that before the bank lowers interest rates, it will want to ensure that inflation is scaled back to a sustainable level.
Shenfield echoes this sentiment. He views the announced rate hike and indication that further hikes are coming as sending “a message that the Bank of Canada is willing to sacrifice some economic activity, and take some risks that we’ll see a recession, in order to get inflation falling in the coming year.”
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Keeping the economy on track
Raising interest rates slows spending, which helps put the brakes on inflation. Unfortunately, it’s necessary for a prolonged period of slowed growth to help the economy get back on track.
The neutral rate is a rate that doesn’t stimulate or restrict the economy. Presently, the estimated neutral rate is 2.5%.
“Being at 3.25%, it would be in restrictive territory, which means at some point it needs to come back down to what they estimate the neutral rate is.”
“They will want to make sure that that inflation is back sustainably […] It's hard to predict exactly when that will be at this point.”
Charbonneau points out that front loading rises in the interest rate is a way to expedite the changes needed to lower inflation. This was reflected in the speech that accompanied the July hike of 100 points, and another significant rate hike will help to get to neutral territory faster.
With the bank’s rate hikes “inflation should get under control, the economy is already slowing.”
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