By Craig Lord  | Posted January 25, 2023 3:51 am  Updated January 26, 2023 5:22 am | from Global News

Raising the key interest rate makes borrowing more expensive in general and forces Canadians and businesses to put more of their budget towards paying down debt, reducing spending demand in other sectors of the economy in hopes of limiting inflationary pressures.

Most economists had expected the 25-basis-point move.

But the central bank said in a statement accompanying the rate hike that it expects to hold the policy rate at its current level while it assesses the impact of its increases to date.

“We’ve raised rates rapidly, and now it’s time to pause and assess whether monetary policy is sufficiently restrictive to bring inflation back to its two per cent target,” Bank of Canada Governor Tiff Macklem told reporters after the announcement on Wednesday.

He added that hold is “conditional” on whether the economy continues to develop according to its forecast, and he made it clear that additional hikes could be in the cards to get inflation back down to the two per cent target.

The Bank of Canada said in an updated set of projections Wednesday that it expects inflation to “decline significantly” in the months to come, reaching three per cent by mid-2023 and two per cent next year. The central bank had previously expected inflation to hit three per cent by the end of the year.

Here, too, policymakers added a caveat. Macklem acknowledged that the Bank’s forecast for inflation depends heavily on global factors such as energy prices. And while goods prices have shown improvement lately, the stickiness of inflation in the services sector is another risk to the Bank’s outlook, he said.

“Inflation is still over six per cent. Yes, we are certainly seeing clear evidence … that inflation’s coming down. But we do have to be humble. There are a number of risks out there,” he said.

Macklem clarified that just because the Bank uses a target range of one to three per cent to guide Canadians’ inflation expectations, the central bank won’t be satisfied with inflation hitting three per cent — it will continue to tighten monetary policy until it hits the mandated two per cent goal.

The pause on interest rate hikes could end if the Bank starts to see an “accumulation of evidence” that inflation and other economic indicators aren’t heading the way policymakers expect, Macklem said.

Asked by reporters whether interest rates could start to decline, the central bank governor pushed back on speculation amid money markets that a rate cut is coming before the end of 2023.

“It’s far too early to be talking about cuts,” he said.

Royce Mendes, director and head of macro strategy at Desjardins, said Macklem and his team would likely keep rates on hold for at least the next few months.

“As a result, we expect that this will be the final rate hike of this cycle,” he said.

How will the rate hike hit the housing market?
Wednesday’s decision means the cost of borrowing on many loans such as mortgages in Canada has risen by a cumulative 4.25 percentage points since the start of the central bank’s rate hike cycle last March.

This is significant for those with variable-rate mortgages especially, as those products see the interest on their debt rise immediately in line with the Bank of Canada’s policy rate.

Shannon Terrell, financial expert with NerdWallet Canada, told Global News that homeowners with variable rates can expect their payments to stay near their current levels through 2023.

Those with fixed-rate mortgages who are renewing into today’s higher interest rate environment might also want to consider shorter-term mortgages of less than five years, Terrell suggests, in hopes of locking in a lower rate when the Bank of Canada eventually starts cutting rates.

But she cautioned that Canada isn’t “out of the woods yet” when it comes to inflation, and said Canadians making mortgage decisions ought to watch price pressures for an indication of where interest rates could go.

“If inflation continues the downward trend, future rate hikes may not be necessary. And if we continue to see the rates fall, it actually gives the bank a reason to potentially even lower the rate by a marginal amount. But we’re likely not going to see something like that happen until late 2023,” she said.

Housing activity has cooled in Canada since the start of the Bank’s current rate hike cycle, with home prices in some markets facing double-digit declines from the peak roughly a year ago.

Speaking alongside Macklem on Wednesday, Senior Deputy Governor Carolyn Rogers said the slowdown in housing has been “in line” with the Bank of Canada’s expectations, though economists at the central bank believe “there is a little bit further to go for housing to come down a bit.”

Despite recent weakness, she said she expects the country’s housing market to “come back” later in 2023 amid strong “fundamentals” such as growing demand from immigration.