Mortgage rates will rise, the Bank of Canada will be forced to increase early: Desjardins
The central bank of Canada is increasingly feeling the pressure of inflation. Desjardins, the largest cooperative financial group in the country, has stepped up its interest rate forecasts. They see the Bank of Canada (BoC) raising rates a quarter earlier than expected. High inflation is driving the change, and that will drive up the cost of mortgages.
Bank of Canada set to raise rates 3 months ahead
Canada’s central bank will be forced to accelerate its overnight rate hike schedule. The BoC is now expected to hike rates by 25 basis points (bps) in July 2022. That would double today’s rates, highlighting how low they are currently. Another hike of similar size is expected to follow in the fourth quarter.
Previously, they didn’t see the rate normalization process begin until October 2022. Now it has risen by a quarter, with another rate hike next year. The overnight rate is expected to end in 2022 at triple today’s levels. The risk comes quickly.
Canadian mortgages will rise, especially shorter terms
Desjardins is also raising its forecast for the average mortgage rate posted next year. The 1-year fixed rate forecast has risen to an average of 3.00% for 2022. This is a 20 basis point increase from the previous forecast. Short-term rates are heavily influenced by the overnight rate, especially variable costs.
The 5-year fixed mortgage rate is also experiencing an increase in costs, but not as significant. They now see an average rate of 5.10% for 2022, up 10 basis points from previous forecasts. Yes, you may have noticed that the hike is only half the size expected at 1 year old. A 5-year fixed rate mortgage is more heavily influenced by the yield on government bonds. These are already on the rise.
Fixed rate mortgage forecast in Canada
Desjardins forecasts for fixed-rate mortgages posted across Canada, for 1-year and 5-year terms.
Source: Desjardins; Better accommodation.
Interest rate hikes in Canada will be accelerated due to inflation
The sharp acceleration in rate forecasts is due to the economy, and to inflation. Despite the setbacks, they still see the economy on track for a quick recovery. Even soaring inflation has failed to dampen the demand for goods. This indicates that the economy is strong enough to handle a rate hike.
Speaking of inflation, this is a huge problem, although no one will admit it. Desjardins points to the annual growth of 4.1% in the CPI reported in August, the highest level since 2003. Their economists have found that 54.2% of the total components of the CPI basket are growing above the BoC’s 3% higher target. Escalating inflation is seen as passing over time, but they warn that the risk is on the rise. This warning is oddly common these days.
The Canadian economy suffered slight setbacks in the last quarter, but is still on track for a rapid recovery. Fears of a slow recovery in the economy turn into fears of high inflation. For an institution to accelerate rate hikes here, inflation has to be more of a concern than growth. Reading between the lines, Canada is now very close to that point.
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