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Variable-rate mortgage holders are in for “more pain” following the Bank of Canada’s half-expected decision to hike interest rates again.

In today’s announcement, the Bank said that with core inflation running between 3.5 and 4% and excess demand persisting, it determined that “monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.”

The tone of the statement was “pretty hawkish,” according to BMO’s Benjamin Reitzes, who added it’s not surprising given the strong data that has come out recently.

That includes an uptick in CPI inflation for April, which ended a five-month deceleration trend. Headline inflation rose to 4.4% in April, up from 4.3% in March, and was driven largely by rising rents and higher mortgage interest costs.

The Canadian economy also added another 41,000 jobs in April, more than double what analysts had expected, which kept the unemployment rate at 5% for the fifth straight month.

“Looking ahead to July, policymakers will continue to assess the incoming data on inflation (core and headline), excess demand, wage growth, and corporate pricing behaviour,” he wrote in a research note. “If the data remain firm over the coming few weeks, another 25-bps hike in July looks likely.”

RBC’s Josh Nye agreed, noting that “it’s an unusually short five weeks until the July rate decision, but that period is packed with key releases including two employment reports, another CPI reading, an updated April GDP estimate and May flash, and the Q2 Business Outlook Survey.”

“The onus is clearly on that data to soften broadly to preclude another rate hike, and timing a slowdown has been challenging,” he said.

The next Bank of Canada rate decision will take place on July 12, 2023.

“More pain for longer” for mortgage borrowers

Ron Butler of Butler Mortgage tweeted that the decision means those with an adjustable rate will see their monthly payments rise, while those with a static-payment variable rate will see their amortization period extend some more.

“More bad news for everyone with a mortgage renewal [coming up] soon,” he wrote. “[And] we will likely see some additional slowdown in the housing market after the super-brief spring market…[to] sum it up: more pain for longer.”

Banks and other financial institutions are expected to follow the Bank of Canada’s lead and raise their prime lending rate, which is used to price variable-rate mortgages and personal and home equity lines of credit (HELOCs). Prime rate should rise to 6.95% over the next day or so.

Bond yields soar to 15-year highs

Those in the market for a fixed-rate mortgage are also facing higher rates following rate hikes by numerous lenders over the past couple of weeks.

And rates could continue to rise, particularly after a surge in bond yields on Wednesday morning following the Bank of Canada’s rate hike announcement. Markets are also now pricing in a nearly 100% chance of an additional quarter-point Bank of Canada rate hike by September.

The Government of Canada 5-year bond yield surged 20 basis points to a 15-year high of 3.75%. Similar highs were also reached by the 2- and 3-year bond yields earlier this week.

“Markets expected a pause. Now that the hike was done, the bond market is re-pricing all the assumptions,” Ryan Sims, a TMG The Mortgage Group broker and former investment banker told CMT. “These higher 5-year yields will be through to mortgage rates by the end of the week.”

John Pasalis, founder and president of Realosophy Realty, said these increases will make it more difficult for buyers to afford homes at current prices.

“Fixed rates have been on the rise over the past few weeks, and based on what is happening in the bond market today, fixed rates are likely to go even higher,” he tweeted.

“Part of the motivation leading buyers to jump back into the market earlier this year was the belief that the BOC was done hiking rates,” he continued. “But the idea that the BoC may not be done raising rates and that rates will likely stay higher for longer should chill the FOMO we’ve been seeing in the market the first half of this year.”

Source: Canadian Mortgage Trends