‘They’re going to rise very aggressively’: Experts predict big interest rate hikes this year to rein in soaring inflation

Interest rate hikes are on the horizon as inflation in Canada continues to soar.

Experts say consumers can expect a slight cooling in the housing market, continued high prices for food and other commodities, and possibly higher wages as well.

The annual pace of inflation hit a three-decade high in December 2021, according to Statistics Canada, hitting 4.8% from a year earlier. The sharp rise is partly due to higher costs for real estate, food and passenger vehicles. And, as 2022 unfolds, economists say it’s not over yet.

The Bank of Canada is expected to make an announcement next week. And economists are predicting a series of interest rate hikes in the coming year as the bank tries to quell inflation. Some traders bet up to six.

TD Chief Economist James Orlando said TD the official call this year is for four rate hikes, although markets are pricing in five or six. Four hikes would take the Bank of Canada’s interest rate to 1.5%.

“The Bank of Canada is … a little behind the curve when it comes to inflation, but it’s going to rise very aggressively,” he said.

TD expects rates to rise quickly, Orlando said, so the Bank of Canada can ease them as much as possible.

One of the main intentions of the rate hikes will be to cool the Canadian housing market, which has been fueled in part by cheap mortgages, Orlando said.

Canada cannot afford the current price growth to continue unchecked, he said.

“It creates a lot of risk for the financial system in Canada, and the Bank of Canada doesn’t want those risks to increase any further.”

By the end of 2022, Orlando predicts there will be no more cheap mortgages available. Those who have chosen a variable rate may want to opt for a fixed rate if they can, he said, otherwise they should expect to pay more as the year progresses, which affects their purchasing power.

David Macdonald, senior economist at the Canadian Center for Policy Alternatives, said that although the housing market is not technically within the jurisdiction of the Bank of Canada, inflation is and housing has been one of the main drivers of inflation over the past year.

Rising interest rates will increase the cost of carrying, or the monthly cost, of a short-term mortgage, Macdonald said. This in turn could moderate the rise in property prices. If this change is large enough to deter investors from the housing market, homes could actually become cheaper, possibly reducing the cost of carrying a mortgage even if interest rates rise, he said. .

“It might just be a good move for consumers,” Macdonald said.

RBC senior economist Josh Nye said the impact of impending rate hikes is already being felt on long-term bond yields and mortgage rates.

“Five-year fixed rate mortgages have started to rise and we think that will continue and maybe pick up a bit once the bank starts raising interest rates,” he said. declared. “So that will definitely have a chilling effect on the housing market.”

“In absolute terms, we’ll still be talking about a pretty strong housing market in 2022,” Nye added, but “not nearly the pace of home sales we saw in 2021.”

Pedro Antunes, chief economist at the Conference Board of Canada, said a correction in the Canadian housing market is coming, although it’s unclear when that will happen.

“I don’t know if housing markets are really supported by demographics and fundamentals here,” he said.

The Conference Board is considering three rate hikes this year in Canada, Antunes said, and more in the United States.

In the near term, inflation will remain elevated, Antunes said, although he noted that December’s numbers look less scary when compared two years ahead.

December was likely the peak of headline inflation, Nye said, as some of the biggest economic stresses are likely to ease, but other drivers of inflation loom on the horizon, such as wage growth.

Price increases will continue in 2022, led by real estate, food and passenger vehicles, Orlando said. While inflation won’t stay near 5%, he doesn’t see it approaching the Bank of Canada’s 2% target anytime soon.

However, if prices should continue to rise, so too will wages. Rising inflation hasn’t been matched by wage growth so far, Orlando said, but with the current labor market, workers have bargaining power and could see their wages rise in 2022 by result.

One of the purposes of raising interest rates is actually to slow wage growth, in an attempt to in turn slow rising prices, Macdonald said.

That’s one of the trade-offs of cooling inflation, he said, adding that at least in the short term, some consumers and business owners might feel the pressure.

“Higher interest rates have a direct cost for some people.”

With files from The Canadian Press

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