‘Cost of living, food, gasoline’: Bank of Canada’s interest rate change a worry for some

The Bank of Canada responded to continuing inflation with another quarter per cent hike to its benchmark interest rate Wednesday.

The move is designed to help prevent the inflation rate from getting stuck above the bank’s two per cent target but the higher rates will have an impact on families already struggling to make ends meet.

The bank boosted its policy lending rate by 25 basis points to now sit at 4.75 per cent, which is the highest it has been in more than two decades.

Michael Devereux, a professor in the Vancouver School of Economics at the University of British Columbia told Global News that two factors affected the bank’s decision: inflation ticked up slightly in the last Consumer Price Index report from Stats Canada, and economic growth was higher than expected in the first quarter.

He said it could have gone either way.

“We might have imagined that the bank would have been pushing towards slightly increasing rates,” he said. “On the other hand, they did say that it would take some time for their rate increases to come into effect and the increase in inflation was very small.”

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Devereux said the other key factor is the increase in interest rates has not really kicked in for most mortgage holders yet.

“We’ve seen that mortgage rates have gone up, but even those homeowners on variable rates have had, you know, a little bit of forbearance … I think the number is only about 20 per cent of mortgage holders have seen an increase in their monthly payments. Now, that will increase substantially over the next year and two years if interest rates stay high.”

He said the Bank of Canada is going to wait to see how things pan out over the next six weeks.

“The fact you still have pretty high population growth in economy, a labour market that has a lot of vacancies … it’s putting upward pressure on wages … these are variables that are essentially feeding into this trend,” Bryan Yu, chief economist at Central 1 Credit Union.

After eight consecutive rate hikes, the bank took a pause in March, much to the relief of consumers, but that pause is over for now.

The Bank of Canada said in its statement Wednesday that it still sees inflation reaching three per cent sometime this summer as last year’s substantial price gains “fall out” of the annual data, but the central bank did not reference its earlier prediction that inflation would reach two per cent sometime in 2024.

“I think one of the explanations might be that inflation is something that’s very much in your face,” Devereux said. “You see it when you go to the supermarket. You see it when you fill up your gas tank. You know, even though you still have money in the bank, you’re still getting your salary paid and you can still maintain your monthly payments, etc. You’re reminded of it every time you go outside and make a payment.”

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Sherlock Yam, a mortgage broker with Clear Trust Mortgages said he is seeing the rate increase hurting low-to-middle-income individuals.

“Rents are at all-time highs. Cost of living, food, gasoline. You know, it’s affecting a lot of those people,” he said.

“Middle-class individuals, the people that I’m helping, hoping to get into a home for the first time or maybe even upgrading to their second home, you know, they’re dipping into the lines of credits and these interest rate increases are making it worse for them,” Yam added. “Also, the small businesses that they buy from. So it’s definitely impacting more than people think. It’s not just about the people who have all these houses and all these mortgages. No, it’s definitely affecting the middle-class, low-income individuals.”

He said he has clients who are landlords that are thinking about selling right now because they can barely afford to cover the costs due to rents not increasing to the level of mortgage payments.

“The ones that I’m also seeing affected are people who have mortgages that are coming up for renewal this year,” Yam added. “And, you know, their mortgage payments from $2,500 is now $3,500 or almost $4,000. So it’s definitely stressing out a lot of my clients.”

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But Devereux said there is still a positive in what’s happening.

“The banks are still forecasting inflation to come down to 3.0 per cent towards the end of the year,” he said.

“And if that’s the case, then we’ll see likely that they’ll be able to reduce interest rates a bit and we’ll have mortgage rates come down again.”