Bank of Canada Hikes by 75 Basis Points, Brushes Off Housing Woes, Dip in CPI, Slowing Growth

“Housing market is pulling back as anticipated, following unsustainable growth during the pandemic.”

By Wolf Richter for WOLF STREET.

The Bank of Canada hiked the target for its overnight rate for the fifth time in a row, today by 75 basis points, to 3.25%, the highest since 2008, following the 100-basis-point monster hike at the last meeting, which got everyone’s attention.

In the statement, the BoC said that its policy interest rate “will need to rise further,” as the outlook for inflation and inflation expectations remain high, and it’s “resolute” in its “commitment” to bring this inflation under control, thereby squashing any hopes for a “pause” at the next meeting.

Quantitative tightening will proceed on autopilot, “complementing increases in the policy rate,” it said. So far, total assets on its balance sheet have dropped by 24% from the peak.

How much “further” will rates have to rise? The BoC didn’t say. But it’s thinking about it:

“As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target,” it said, but didn’t mention “frontloading” this time. In other words, it’s going to be dependent on data.

And in terms of the current data, it’s interesting: The BoC downplayed the slowdown in the economy; it brushed off the dip in overall inflation, but emphasized the increase in core inflation; and it brushed off the woes in the housing market.

Hawkish on inflation, downplayed dip in overall CPI.

The statement said that plunging gasoline prices caused overall CPI to cool slightly from red-hot 8.1% in June to 7.6% in July, both of them 40-year highs.

But it downplayed this easing of overall CPI, and instead emphasized the increase in core CPI, driven by price pressures in services, as inflation has broadened:

“However, inflation excluding gasoline increased and data indicate a further broadening of price pressures, particularly in services.

“The Bank’s core measures of inflation continued to move up, ranging from 5% to 5.5% in July.

“Surveys suggest that short-term inflation expectations remain high.

“The longer this continues, the greater the risk that elevated inflation becomes entrenched.

Downplayed slowing growth in the economy.

Economic growth slowed to 3.3% in Q2. But the BoC downplayed it: “While this was somewhat weaker than the Bank had projected, indicators of domestic demand were very strong – consumption grew by about 9.5% and business investment was up by close to 12%,” it said.

“The Canadian economy continues to operate in excess demand and labour markets remain tight,” it said.

Brushed off the pull-back in the housing market.

Mortgage rates in Canada have surged. Mortgages are typically variable-rate mortgages or mortgages with rates fixed for 1-5 years that then adjust, and the housing market is much more impacted by changes in short-term rates than the US housing market, where 30-year fixed rate mortgages dominate.

For example, the Canada 1-year Treasury yield has shot from about 0.25% in October last year to 3.75% today:

The pull-back in the housing market which is now causing so much hand-wringing in Canada, was “anticipated,” it said, following unsustainable growth during the pandemic.”

Where to go from here?

With the policy rate now at 3.25%, there likely won’t be another 100-basis-point monster hike. That was a July-thing to get everyone’s attention. For today’s meeting, expectations had ranged from 50 basis points to 100 basis points. The BoC hit the middle. A hike between 25 basis points and 75 basis points appear to be on the table for the next meeting in October, which would put it on track to hike its policy rate to 4% or maybe more at the December meeting.

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  63 comments for “Bank of Canada Hikes by 75 Basis Points, Brushes Off Housing Woes, Dip in CPI, Slowing Growth

  1. Pea Sea says:

    I would love to see the US Fed use a phrase like “unsustainable growth” to describe the insane spike in housing prices during the pandemic.

    • WA says:

      US markets remain so crazy that if Fed raises by only 50 basis points instead of expected 75 basis points, we can expect a 10% stock rally with 50 basis point dip in US treasuries and 30 year mortgage!

      • AB says:

        WA

        I relate to your sentiment.

        However, at the present time, the stock market ripping higher in the face of rate hikes and QT should only be viewed as temporary – yesterday was a knee-jerk reflex to many consecutive down days. This fight back will fade in the coming hours or by Friday. It is in fact pointless.

        This is a stock market with far more weight on top of it than support beneath. A nailed on bear market.

        A 10% stock rally is out of the question this month.

  2. Kerry says:

    Hopefully, we follow suit…

  3. Gattopardo says:

    Kudos. More pressure on the Fed to do the same.

  4. Bobber says:

    Housing inflation in Canada has terrorized locals, especially younger people looking to buy that first home. Not sure why the Bank of Canada allowed this to happen. It seems like pure negligence.

    • Depth Charge says:

      All by design. Follow the money. The people in charge of the policies have benefited fantastically. Never before in history have the wealthy had so much.

      • VintageVNvet says:

        How about when the wealthy basically owned ALL of WE the PEONs DC?
        Wouldn’t that count?
        Seriously, there have been many times just in the last few centuries when the ”wealthy” had life expectancies, not to mention life extravagancies, FAR beyond double that of WE the PEONs.

  5. L says:

    Good job. The bank needs to squash inflation. We need a crash before we can reboot the system.

  6. Crush the Peasants! says:

    Hosers!

  7. Thunder says:

    This all seems a little bit late, I could never see the need for rates being lowered to levels never seen before during a pandemic. It lit a bonfire of inflated housing prices and demand around the World.
    Now we have the absolute problem of currencies competing for Yield against the US dollar. Look at the Yen, AUD, Pound & Euro as they fall creating inflation. China is the next major problem in this inflation nighmare

    • Brant Lee says:

      The dollar at 110, and the stock market is back to the races today. Up on what news I have no idea except oil dipped 5%.

    • Depth Charge says:

      When the stock market started to wobble, Powell and Co. showed up in a minute to promise that they would do anything and everything to pump it up. There was nothing they wouldn’t do, even buying stocks and junk bonds if they had to.

      When their deranged policies started destroying the poor, taking away their ability to even afford shelter, with inflation raging, they said that it was “transitory” and they were going to “let it run hot.” This wasn’t just reckless, it was diabolical. There is a great evil among us who are actively and intentionally hurting people.

  8. Augusto says:

    There is not much visible evidence of a slowdown in housing yet where I live here in Canada. I do hear lots of concerns about cost of living and fears of mortgage re-financings from younger people. Not sure what will crack first, the retail sector or housing. Savers like me are happy with the increase in interest rates.

    • Argus says:

      On Vancouver Island, B.C., housing inventory has increased, year over year. The Real Estate Board’s data shows that, in August 2022, inventory of single family homes was up 153% from August 2021. Sales showed a 33% decrease. Prices up 18% but looking at realtor’s websites, have stopped increasing and may even be starting to drop a little.
      The trend for condos and townhouses is similar.

  9. 2banana says:

    I am gonna guess a very cold winter in Toronto this year.

  10. Depth Charge says:

    This is a really horrible time to be alive for people with few resources. It’s billionaires on parade while the poor lose everything.

    • unamused says:

      ‘All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.’

      – Adam Smith, Wealth of Nations, III, iv, 448.

      • realist says:

        unamused: thank you for that quotation from a highly astute observer. Ugly as this truth is, at least we can comfort ourselves that there is nothing new in this regard today. Just perhaps more of it, and unabashed.

        • DawnsEarlyLight says:

          Comfort, Ha! More like condolence.

        • NBay says:

          “Condolences”, meaning you Calvinists’s now feel assured that the victory of “common sense” is a now a certainty?
          Boy, are you guys in for a surprise! You aren’t along for the ride, merely “tools”.
          But you do get eternal life….or so I’ve heard……….

    • Valerie from Australia via America says:

      I agree. I am full of empathy – as I can see you are – for those whose only option is to suffer an even worse economic degradation. So many of these people work their whole lives and have little if nothing to show for it. This is just plain wrong.

  11. MiTurn says:

    “Mortgages are typically variable-rate mortgages or mortgages with rates fixed for 1-5 years that then adjust…Canada 1-year Treasury yield has shot from about 0.25% in October last year to 3.75% today.”

    So, a lot of mortgage holder’s mortgage payment just shot up?

    • Saffron says:

      Only if you are renewing. On an existing mortgage just means more of the payment goes to interest and less to principle.
      Unless of course rates climb so high that the payment doesn’t cover interest….then you have carnage.

      • DawnsEarlyLight says:

        Is this ‘variable’ interest rate claimable as a tax deduction?

        • Valerie from Australia says:

          Not in Australia – In fact, the U.S. is the only country (I know of) where mortgage interest is tax deductible. I’m happy to be corrected.

        • Jos Oskam says:

          @Valerie
          In the Netherlands mortgage interest has been fully deductible for a long time. Only recently some restrictions have been introduced, like a 30 year maximum period, a cap based on the percentage of tax paid and the requirement to pay back principal.
          These changes have passed virtually unnoticed in an extremely low interest rate environment, but may come to surprise some folk when mortgage rates rise.

        • Alku says:

          @Valerie from Australia

          “the U.S. is the only country (I know of) where mortgage interest is tax deductible. I’m happy to be corrected.”

          Finland

    • Antwan says:

      No, Canada actually has 2 types of “variable” rate mortgages. The more typical variable rate mortgages (VRM) have steady payments unless a “trigger rate” is hit. The trigger rate is the point at which the original payment no longer covers interest on the mortgage. To prevent the mortgage balance from actually going up, payments will increase when rates go past the trigger rate. We are getting awfully close to it with some people’s mortgages now showing 90-year amortization (amortization approaches infinity just below trigger rate). The other type is more similar to American-style mortgages and is the adjustable rate mortgage (ARM). The payments on these do increase as the rate changes so amortization stays steady. ARMs are relatively rare and Scotiabank is the only major bank issuer. The rest are generally issued by monoline or “B Lenders”.

  12. Gen Z says:

    Good. Good.

    Let the speculators and FOMO crowd feel the hardship like the non-asset renting class did for the past few years!

    Canada is becoming a feudal society with haves and have nots.

  13. Bobber says:

    Please note how central banks identify “unsustainable” housing price growth only when CPI is elevated. Housing prices rose 10-20% a year for a decade, yet they thought that was acceptable (if not desirable) because CPI was in the range. In fact, they refused to recognize RE prices were elevated.

    Who’s responsible for such ridiculous viewpoints and results, and why are they permitted to exercise continuing economic control?

    Time for a reset of monetary policy and governance.

  14. Brian M says:

    I am surprised we Canadians did not get slapped with a 1% rate increase. It takes 2 good incomes & help from the bank of Mom & Dad & their cousin moving in & paying rent. It reminds me of life on the farm some 50 -60 years ago. multi-family living. What’s old is new again.
    Buckle-up as we are just getting started.

  15. eg says:

    Does this make Canada #1 among the rate-hiking G7 nations?

    • Wolf Richter says:

      Yes, by a pretty good margin too.

      • CC says:

        Plus Canada’s population is among the most debt-laden and housing-dependent of the G7, so it will be interesting to see how this plays out, and how soon, relative to the other countries.

  16. WakeUp says:

    Use of interest rates to tame inflation especially when a lot of it is a supply side issue is a blunt instrument that hits only a small segment of the population especially those that can least afford it.

    To tame inflation in Canada and the USA a better approach would be to increase taxes on those making big bucks.

    For example, introduce a graduated income tax surcharge on people.

    Say 5% on incomes over $100,000; 10% on over $150,000; 15% on over $200,000, and 25% on everything over that.

    It would take a lot purchasing power out of the markets right away and limit the impact of interest rate hikes on lower income earners.

    • Halibut says:

      You’re kidding, right??

    • Those are also the income earners who invest capital in growing the economy. Economies based on redistribution stop growing.

      • eric says:

        Aye, there’s the rub.

      • unamused says:

        “Those are also the income earners who invest capital in growing the economy.”

        A phony excuse that’s been discredited since at least the 19th century.

      • Bobber says:

        I see. High wealth people are automatically considered job creators and receive special treatment. I can think of no better way to create monopolies.

      • NBay says:

        Calvin provided the moral justification long ago in case the economic theory doesn’t convince you that it’s the right way to go for “the good of all”.
        It’s so deep in (unfortunately) at least half of the American psyche nobody even knows it…..except maybe for Osteen fans and the like. He got rich preaching it.

    • Valerie from Australia via America says:

      That might be a bit extreme. The problem is all the loopholes for the top 1 to 3% – totally legal loopholes unfortunately.

      • unamused says:

        Tax evasion is the world’s biggest industry and constitutes a large share of the economy of several countries.

        When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.

        • NBay says:

          Probably a lot of people have heard this, but I think it’s still worth repeating.

          If one monkey hoarded all the bananas and left the others to starve, scientists would check him out to see what the hell was wrong with him.
          If a human does it, he goes on the cover of Forbes.

    • The Real Tony says:

      They have surtaxes and supersurtaxes in Ontario, Canada where most of the population of Canada lives. They tack this onto the existing income tax you pay. It starts around the $77,000 level of net income.

    • Nicko2 says:

      Teachers earn up to $100K a year in Canada. Tax real wealth, and corporations.

  17. Citizen AllenM says:

    Leverage will kill investors for years. Oil is wobbly because Russia is wobbly. Now, a new desperate regime will pump to fund peace and buy off the people after this disaster. Or so the market believes, meanwhile everyone keeps believing in huge inflation again.

    And sanctions leak like a sieve, metals show this in spades. Why is platinum so cheap?

    Mortgages cost a lot more, as Wolf keeps pointing out, so prices MUST Fall to accommodate, The Fed will quit when inflation is dead and wages moribund.

    • Flashman says:

      I understand that platinum is cheap because less diesel catalytic converters are needed in the world. Substitutions for palladium in gasoline vehicle converters must be more difficult for manufacturers than we lay persons think.

      • Some Guy says:

        Some years ago, I got a palladium wedding band since, at the time, it was far cheaper than platinum – best investment I ever made :)

        But although I was able to ‘buy low’, my wife may not appreciate it if I tried to ‘sell high’.

        As for the topic at hand, the central bank reminds me of someone learning to drive – first they slam on the accelerator, now they slam on the brakes – Canadians who aren’t buckled up will probably head through the windshield in 2023.

  18. Ben says:

    There needs to be more rate hikes to cool down the Canadian housing market.
    Real estate agents were making more money than medical doctors last year!

    • The Real Tony says:

      The average entry level resale apartment at the lowest end of the scale in Ontario, Canada costs more than the average home price in America.

  19. Happy1 says:

    Yes, that would certainly stop inflation. It would also destroy the jobs of most of the middle and working class.

    • Tim says:

      So what to choose? Runaway inflation leading to Weimar Germany or to bring down prices? The only people complaining now are those who are speculating in Canadian real estate.

  20. Jake Bodhi says:

    With a strong USD, and higher rates in Canada, maybe Canadian bonds give a higher return?

  21. Nicko2 says:

    Canada will be just fine. Worry about EU/UK.

  22. unamused says:

    Higher interest rates enable banks to charge more when they rent out money, allowing them to increase their profits by causing consumer inflation. They had already taken asset inflation about as far as it could go.

    You were probably wondering who benefits from raging inflation, and now you know.

    • Flashman says:

      They don’t seem to care about inflating financial assets. They only get worked up when wage inflation starts. Capitalist’s relied on cheap labor since civilization began. Back then it was called slavery.

      • NBay says:

        “Independent contractor” is even BETTER than slavery.

        The had make efforts to keep the slaves alive and functional. Now….who cares?…it’s the much hated government’s problem.

        I remember when I first heard managers use the term “Backfill” for moving/shifting/reassigning, etc, workers around.

        I thought, “DAMN, that is a construction term for pushing temporarily dug out DIRT back into a hole that was dug for a foundation, or pipe, or whatever.

  23. Dylan says:

    Question for Wolf about Indemnity…It looks like the chart on the BOC stats page is broken lol….So as the BOC increases rates doesn’t that put upwards pressure on say the CA10 year yield etc…..(bonds sell off) and the Indemnity grows on the balance sheet which is good for the BOC (asset) because its money owed to them by the government(tax payer)?…Even if there not sold and allowed to roll off the balance sheet they are still rolled off at a loss if yields cont. to rise?…This whole thing stinks just trying to understand what the taxpayer is on the hook for here…I think the BOC is acting tuff but there’s gunna be a pivot due to a new crisis lol…not a conspiracy theorist but the whole real estate bubble will burst if its not starting already 3.25% is gunna hurt bad could pop it.

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