Cottage owners paying off a mortgage got some bad news on Wednesday after the Bank of Canada raised its policy interest rate a full percentage to 2.5 per cent, the largest one-time increase since 1998.
“An increase of this magnitude at one meeting is very unusual. It reflects very unusual economic circumstances,” said Tiff Macklem, Governor of the Bank of Canada, during a press conference.
The Bank of Canada introduced the hike in response to the country’s runaway inflation rate. In May, Canada’s inflation rate rose to 7.7 per cent, the largest yearly increase since January 1983. As a result, the price of groceries, gas, and other necessities has risen in the last several months.
Inflation is caused when demand is greater than supply. According to Macklem, the factors driving inflation in Canada, as well as the rest of the world, include Russia’s invasion of Ukraine, the dizzying price of oil, pent up demand caused by the pandemic, and continued supply chain disruptions. By raising interest rates, the Bank of Canada hopes to dissuade people from borrowing money and making purchases, cooling the market and allowing supply to catch up with demand.
The downside of increasing interest rates is that it makes borrowing money more expensive, including student loans, lines of credit, and mortgages. The real estate market is already seeing the effects as sales volume begins to slow. “People qualify for smaller mortgage loans, and they perceive a higher cost. It’s just less appetizing to pay more interest,” said Tom Davidoff, an economics and real estate professor at the University of British Columbia. “It’s just money out of your pocket.”
Cottage prices in Canada are expected to reach an average high of $640,710 in 2022, according to Royal LePage, and have yet to see a significant dip. But Davidoff said that the slowing sales volume is an indication that a price drop will follow.
Individuals who purchased a cottage during the pandemic with a variable rate mortgage will be feeling the effects of the rate increase, while those who took out a fixed rate mortgage should be protected against the increase for the next few years.
Another concern with rising interest rates is that both Canada and the U.S. are headed for a recession. The stock market indicates pessimism on part of the investors, explained Davidoff, “The ratio of price to earnings on stocks has really plummeted.”
On the other hand, Davidoff added that our job market and housing demand have remained strong. “So, there’s a long way to go before a recession.”
For the time being, Canadians should expect further increases in the Bank of Canada’s interest rate. “We are increasing our policy interest rate quickly to prevent high inflation from becoming entrenched. If it does, it will be more painful for the economy—and for Canadians—to get inflation back down,” Macklem said.
The bank’s goal is to get inflation back to its 2 per cent target by 2024. The bank is scheduled to make its next interest rate announcement on September 7.
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