Behind this expected increase of 50 basis points in the Bank of Canada’s key rate, we can observe a change in tone in the press release, which has become more of a rant or a thump on the table, it depends, in the face of a inflation still remaining out of control.
In April, after an increase of 50 points which doubled that of March, the Bank of Canada announced an upward revision of its estimate of the neutral rate, i.e. the interest rate compatible with production which remains durably at its potential level. and an inflation rate that remains on target. The estimate has moved to a range of 2% to 3%, from 1.75% to 2.75% at the start of the year. More was done, however, in nuance. “If demand responds quickly to higher rates and inflationary pressures ease, it may be appropriate to temporarily halt our tightening once we get closer to neutral, and take stock. On the other hand, we may have to raise rates a little above the neutral rate for a while. »
The central bank was more affirmative on Wednesday and abandoned its reference to the neutral rate. “Given the excess demand in the economy and inflation that remains well above target and is expected to continue to rise in the near term, Governing Council still believes that interest rates will have to increase further […] The Governing Council stands ready to act more forcefully if necessary to honor its commitment to achieve the 2% inflation target. »
In short, she says she is ready to play big and enter restrictive territory for the time it takes to subdue the beast.
Meanwhile in the field
The effects of a 125 basis point hike in the overnight rate since March are already being felt on the ground. In the aftermath, the surge of inflationary fever and runaway prices got the better of consumer confidence. The Conference Board index lost 11.7 points in May, suffering its biggest decline since the start of the pandemic. Consumers’ anxiety about future finances has increased, they have become more skittish about spending and more averse to buying big-ticket items, it has already been written.
Since then, polls have followed one another this week to highlight the concern of households and businesses. In the survey conducted for Chartered Professional Accountants of Canada, 90% of non-homeowners consider rising interest rates to be the biggest barrier to entering the housing market. Follows the affordability of the down payment. For their part, 60% of owners say that it is difficult to pay for necessary renovations, and 40% to respect the schedule of mortgage and tax payments.
The observation is more striking in a survey conducted for the CIBC, where we observe that among tenants, the only effervescence of the housing market continues to be a major obstacle to home ownership. Thus, 69% of them say they expect never to own a house. The rise in interest rates can only add its effect to that of the price level. We can read that 44% do not feel able to save enough for a down payment and that 58% indicate that they will not be able to buy a house without a partner or without the additional income of another person.
More broadly, according to BMO’s quarterly financial improvement index, 49% of Canadian adults have reduced their savings due to rising costs. This proportion reaches 56% among members of Generation Z and 62% among millennials.
And the wheel is not ready to stop turning. On the business side, in a KPMG survey of 256 medium-sized businesses, 69% of respondents said that higher wages had resulted or were going to result in increased costs for their clients. As for the cost of money, 71% say the increased rates have already put “significant pressure” on profit margins, and 59% are in discussions with their lenders, or plan to be, to revise their commitments. . KPMG recalls that in a previous study, a third of the 508 companies then surveyed had indicated that an increase of two percentage points compared to their current borrowing rate would constitute their tipping point.
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