Will the Bank of Canada Keep Hiking Interest Rates?

Key economic indicators point to another overnight rate increase from the BoC, but not everyone thinks another hike is such a good idea.

By Josh Sherman | 3 minute read

Many homeowners across the country are forking over more every month in mortgage payments as interest rates have been steadily increasing since early last year. 

Canadian mortgage borrowers hoping for a reprieve from interest rate hikes may be disappointed — several experts suggest the latest reading of Canada’s labour market means another increase is likely coming this month.

The country gained about 60,000 jobs last month, according to Statistics Canada’s Labour Force Survey for June. That increase — the biggest monthly gain since January — is one that “virtually assures” the Bank of Canada will increase its overnight rate by 25 basis points to 5% at its next scheduled meeting on July 12, suggests Marc Desormeaux, principal economist at Desjardins. “For the time being, the central bank should see the vitality of the labour market and resilience of the overall economy as warranting another rate hike,” he continues in a report.

While the unemployment rate rose by 0.2 percentage points and the rate of wage growth declined, CIBC Senior Economist Andrew Grantham agrees that the numbers are likely too strong for the central bank to stand on the sidelines. However, a July increase would cap the rate-hiking cycle that began in March 2022, he suggests. “We still think that the rate of 5.0% reached at the time of the next hike will prove to be the peak, as evidence that the economy is slowing appears to be mounting,” writes Grantham in a flash response to the employment data.

Since early last year, the Bank of Canada has been trying to restore post-pandemic inflation to its target of 2% through a series of hikes to the overnight rate. The idea is that higher interest rates curb spending, which in turn reduces demand for goods and services and, eventually, prices. However, post-pandemic inflation has proven sticky, and the economy has surpassed expectations even amid sharply heightened borrowing costs.

What Would Another Rate Hike Mean for Borrowers?

“I think it will further stress out existing variable-rate mortgage [borrowers],” Elan Weintraub, co-founder and mortgage broker at Mortgageoutlet.ca, tells Wahi. These borrowers’ monthly mortgage payments are impacted by fluctuations to the overnight rate, whereas fixed-rate loans — the most popular type of mortgage in Canada — have rates that are renewed at the end of a predetermined period, most commonly a five-year term.

However, despite the fact that many fixed-rate borrowers have been insulated from the burden of more expensive mortgage payments so far, experts caution that it’s important to start planning ahead of time for the possibility of higher monthly costs.

For those who have not yet taken out a mortgage, the shockwaves that higher rates tend to send through the housing market could actually prove an advantage. “I subscribe to the Warren Buffett school of thought, which is: It actually could be a really good time to buy now when everyone else is scared,” Weintraub, who also anticipates the BoC to increase the overnight rate once more on July 12, explains. “Yeah, you’re going to pay a higher rate for three years, but you’re not competing with 22 other people,” he says, referring to how bidding wars can drive the price of a Toronto home up by $100,000 or more. The psychological impacts of another rate hike could open the door for some borrowers to save money in the long run by avoiding a bidding war in a cooler market. (Wahi found that bidding wars were less widespread in June — when the Bank of Canada last hiked rates — compared to May.)

There’s Always a Chance the Bank of Canada Hits Pause Again

Not everyone in the world of finance is confident that another rate hike is imminent. “I think it would be premature to do this two months in a row,” Tim Cestnick, CEO of Our Family Office Inc., tells Wahi. “If [the Bank of Canada] really felt that that was the right move, they probably would’ve increased rates by half a per cent last month,” he adds.

Inflation, while not yet meeting the central bank’s target of 2%, has been cooling, notes Cestnick. (The Consumer Price Index, an indicator of inflation based on changes in prices of goods and services, was up 3.4% on a year-over-year basis in May, down from 4.4% in April.)  “I think given the direction inflation is headed, I don’t think they will — I don’t think they need to,” he says. “If you want to slow down inflation, you don’t want to create a nosedive into a very deep recession, and that’s been the risk.”