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4.75% and Climbing: Bank of Canada's New Interest Rate and Its Impact on the Economy and Housing Market ????
June 8, 2023 | Posted by: Dallas Martin
4.75% and Climbing: Bank of Canada's New Interest Rate and Its Impact on the Economy and Housing MarketThe Bank of Canada has done it again! They've raised the target for the overnight rate to a whopping 4.75%, the highest since 2007, before the Great Recession. And guess what? They're not stopping there. They're also continuing their policy of quantitative tightening.
Now, let's discuss how this will affect our beloved housing market. But first, a quick look at the global context.
Consumer price inflation is finally coming down, thanks to lower energy prices. However, stubborn underlying inflation just won't take the hint and leave. It's like that one party guest who can't take a cue and overextends their stay. With major central banks hinting that interest rates may have to rise even further, we can't help but feel a little uneasy.
Back home in Canada, our economy was surprisingly strong in Q1 2023, boasting a GDP growth of 3.1%. Consumption growth was stronger than Popeye on spinach. The labour market remains tight, meaning new workers are being hired faster than you can say 'inflation.' This leads to excess economic demand, which is more persistent than initially thought.
Oh, and did I mention that CPI (Consumer Price Index) inflation rose to 4.4% in April? That's the first increase in 10 months! Prices for various goods and services were higher than expected, making our wallets lighter. The Bank expects CPI inflation to ease to around 3% in the summer, but with core inflation running in the 3½-4% range and excess demand sticking around, there's a chance that CPI inflation could remain stubbornly above the 2% target.
So, what does all this mean for our beloved housing market? With the Bank of Canada's decision to increase the policy interest rate, we might see some changes. The higher interest rates will make it more expensive for people to borrow money, which could lead to a slowdown in the housing market. Additionally, with the higher interest rates come applicants who may find it more challenging to qualify for loans and mortgages. But hey, who knows? Maybe we'll all be pleasantly surprised, and the housing market will remain as resilient as ever.
The Bank of Canada is determined to restore price stability for Canadians, and they're doing so with a mix of rate hikes and quantitative tightening. As for the housing market, only time will tell how it will be affected by these changes. But one thing's for sure: we'll be watching closely, with our fingers crossed and a healthy dose of skepticism.
