The Bank of Canada raised its benchmark interest rate by 0.5 percent to 1 percent on Wednesday and released a new economic forecast saying inflation would remain above its comfort zone for the rest of the year.
Bank of Canada Governor Tiff Macklem and six representatives of the Governing Council raised the benchmark rate from 0.5% to 1% and warned that there would be more hikes as it raised its inflation outlook. This is the largest increase since 2000. (Central banks typically adjust policies 25 basis points at a time.) In March 2020, when the pandemic began, the central bank cut interest rates just above zero.
Currently, the central bank rate is 1%, the bank rate is 11/4%, and the deposit rate is 1%. Banks will also end reinvestment and will begin quantitative tightening (QT), effective April 25. Quantitative tightening is the reverse operation of quantitative easing, which means that the monetary policy adopted by the central bank may cause the liquidity contraction in the financial market. It is the reduction of the balance sheet at the national level, and the recovery of some of the money sent to the market.
The Russo-Ukrainian war brought a lot of uncertainty to economic development. Soaring prices for oil, gas and other commodities are fueling global inflation. Supply disruptions caused by the war have also exacerbated persistent supply constraints and put pressure on economic activity. These factors are the main drivers of the central bank's sharply revised upward revision of Canada's inflation outlook.
(Image source: Vancouver Sun)
The Bank of Canada said gdp would grow by 4.2 percent this year and 3.2 percent by 2023, compared with estimates of 4 percent and 3.5 percent in January. Based on the trajectory before the Canadian pandemic, both represent strong growth rates.
Policymakers expect the consumer price index to climb 5.3 percent in 2022 (previous estimate: 4.2 percent) and next year by 2.8 percent (previous estimate: 2.3 percent).
A year ago, central bankers argued that global inflation was primarily a supply problem. This is no longer the case. The Bank of Canada observed that domestic demand in the United States was "very strong." The Bank of Canada described domestic growth only as "strong". Labor markets are tight, wages are rising, and the economy seems to have learned how to weather the COVID-19 wave. The economy is at least as strong as it was before the pandemic, when benchmark interest rates were 1.75 percent.
(Image source: Vancouver Sun)
In its Monetary Policy Report in January, the central bank said it expected inflation to approach 5% in the first half of 2022 before falling to around 3% by the end of the year.
Statistics Canada reported last month that annual inflation climbed to 5.7 percent in February from 5.1 percent in January. The agency is expected to release its March inflation data next week, which will include a surge in gasoline prices due to the war.
In its economic outlook, the Bank of Canada said it expects annual growth to pick up to 6.0 percent in the second quarter, up from 3.0 percent in the first quarter.
It said the impact of the Omicron COVID-19 variant had weighed on the economy at the beginning of the year, but only briefly.
The central bank said the housing market was strong in the first quarter, but expected sales to slow somewhat as mortgage rates rose.
Toronto real estate expert David Fleming said he expects this interest rate increase to affect housing affordability in the Canadian property market, which will have a significant impact on those looking to enter the market.
Fleming told CTV on Wednesday ahead of the Bank of Canada's announcement: "The rising interest rate we are talking about represents a decline in purchasing power. ”
For example, if someone was previously approved to buy a home worth $750,000, they would only be able to afford a $650,000 home after the interest rate hike. However, in studying the long-term impact of rate hikes on Canadian home prices, Ian Lee, an associate professor at Carleton University's Sproth School of Business, said the end of the tunnel was bright for homebuyers. He said a rate hike would eventually lead to a fall in house prices.
"There is a very clear correlation, as interest rates rise, real estate demand and property prices fall," he said.
Fleming said that for those who already own a home, especially those with floating-rate mortgages, they may see mortgage rates directly affected. This also applies to those who have a personal or household asset line of credit, as these products are directly related to the central bank's benchmark interest rate.
After an exhilarating start to average house price increases from January to March, Fleming said he expects markets to start cooling in April, May and June as inventories soar.
(Image source: CTV News)
In March 2022, the average home price in B.C. reached $1.096 million, up 15.7% from the average price of $946,813 recorded in March 2021.
According to a new report by the British Columbia Real Estate Association (BCREA), Multiple Listing Services (MLS) recorded a total of 11,464 residential unit sales. That's down 24.1 percent from the record level in March 2021.
Year-to-date, residential sales in B.C. are down 4.1% to $28.8 billion compared to the same period in 2021. Residential unit sales also fell 20.1% to 26,577 units, with the average MLS residential price rising 20% to $1.086 million.