Over the past year, Canadians have watched the continued climb of interest rates. This September, the National Bank of Canada is expected to raise the rates once again, however, economists predict that this could be the final hike for a while. This is the fifth rate increase this year as the Bank of Canada continues to grapple with rising inflation. Economists Benjamin Tal and Karyne Charbonneau predict the hike to hit the 75bps mark, amounting to the key target rate of approximately 3.25% as detailed in a recent report.

In a TD report, economist Rishi Sondhi explains that 5-year bond yields are predicted to decrease from 2022 to 2023 as consumption slows due to elevated interest rates. This applies pressure not only on household debt but mortgage debt, which Tal and Charbonneau explain a large quantity was accrued in an environment where the low-interest rate was conducive.

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Mortgage Debt & Household Sensitivity

Though current interest rates are considered lower by comparison to historical rates, the pressure of inflation alongside the burden of increased rates will indicate a slow in consumption. Benjamin Tal and Karyne Charbonneau say that “…households’ fundamentals are now generally stronger than seen at the eve of previous hiking cycles.” They also state that the “…structure of household debt will shield many borrowers from the full sting of higher rates in the coming year.” In Q3, the Bank of Canada reported successful results for portfolios containing home equity lines of credit and mortgages.

Despite progress in the latter, with rising interest rates looming, a slowdown is predicted to follow. Considering this, it is noteworthy that 11% of NBC’s mortgage borrowers are investors, and 31% of its mortgages have variable interest rates. Taking into account the percentage of mortgages that utilize variable interest rates alongside inflation, this suggests that households will have a higher sensitivity toward raising rates.

At this time, economists don’t predict further rate hikes in 2023, however, there is also no indication that interest rates may be lowered in 2024. In essence, Canadian households will have to burden with the increase in rates and inflation however, the capacity to maintain consumption growth at the current rate should preclude the Bank of Canada from loosening monetary policy in 2023.

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Housing Market Stabilization

As monetary policy tightens to bring current excessive inflation rates back to targeted levels, mortgage rates are anticipated to increase. In Canada Mortgage and Housing Corporation’s Spring 2022 report, it is said that higher rates will have a limited effect on home demand and price growth in 2022. The report also states that “…this will be especially true in centers like Vancouver, Toronto, and Montreal where tight resale market conditions will overwhelm higher mortgage rates initially.”

Mortgage volume at the National Bank of Canada increased 8% on a yearly basis, leading economists to predict that the demand for real estate secured financing will continue to stabilize, returning to pre-COVID levels given the rising interest rate environment. At the same time, housing prices are expected to shift, re-stabilizing as an effort to backtrack the soaring 46% accumulation that occurred throughout the pandemic. Most notably, previously where housing prices sky-rocked, namely Ontario and British Colombia, where the steepest declines in price can be found.

Read More: Rate Hikes to Lead to House Price Fall?

Although many Canadians would find lower interest rates more agreeable, in terms of decreasing inflation, consistency is key. Economists believe that to avoid failure in lowering inflation, the maintenance and rigidity of a restrictive monetary policy is needed to balance and ultimately reduce the high level of inflation. Altogether, rarely does the Bank of Canada depart from the monetary policy of the Federal Reserve, which supports predictions of higher rates for a longer period.