Varun Kohli October 24, 2022 No Comments

On Wednesday, October 26th, the Bank of Canada will make its next interest rate decision. We’re now 8 months into arguably the fastest and most intense rate hiking cycles in the history of Canadian finance. The BOC has taken rates from 0.25% in March to 3.25% as of its last decision in September. Mortgage rates are now hovering at around 5.5% to 6%, with the 10 year TD fixed rate mortgage at 6.85%. As Tembo has extensively reported, rates in the U.S. have skyrocketed also. The 30 year fixed mortgage in the United States is now at 7.20%, with the national 30 year refinance rate at 7.30%. In the U.K., the average five year fixed rate mortgage hit 6.28% last week, and is expected to keep rising.


The consensus expectation for Wednesday? It’s looking like another 75 basis point increase, folks. This is the market expectation, what traders are computing for, and what the financial press is reporting. That would take rates up to 4%. Back to where they were in the years before the 2007-8 Global Financial crisis. With that increase, even the lowest special offered bank mortgage interest rates are likely to go up to at least 6%. That means mortgage costs of well over $3,200 a month on a $500,000 mortgage are on their way. Some believe that the Bank of Canada might instead decide to take their foot off the pedal, and only go to a 50 point increase, but that position is held by few. The media narrative is that policymakers and central bank officials are still terrified of inflation flatlining or rising again. There is also the apprehension that a 50 basis point increase would signal a lack of confidence in the economy, or worse, a diluted commitment to vanquishing inflation.


The sixth rate increase since March will come as a number of experts predict it is inevitable that Canada is walking right into a recession. The good news is that CPI has cooled from 8.1% in June to 6.9% in September. Another concern to the BOC is that the Canadian dollar has been plagued with weakness lately, falling 10% against the greenback over the last 12 months. While a boon for exporters and manufacturers, the decline comes despite higher rates, and makes imports more expensive, thus adding to inflation. A 75 basis point increase at home would mirror the very broad consensus that Fed Chair Jay Powell will raise rates by an identical amount when the Fed meets on Nov. 1-2. Two telling recent quotes from Macklem include his admission that there is ‘excess demand’ in the economy (that higher rates will vaporize), and that he has ‘yet to see a clear turning point’ in inflation; suggesting that modest recent declines aren’t reassuring the BOC.

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