Knockout blow to real estate? Bank of Canada seen raising rates up to 3.75 percent by yearend

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      The real-estate market has been reeling from a series of interest hikes by the Bank of Canada this year.

      National home sales fell on monthly and yearly comparisons in June 2022, and that was before the oversized one percent increase announced by the central bank in July.

      The Bank of Canada’s interest-setting rate now stands at 2.5 percent, up two-and-a-half percent from the pandemic-era low of 0.25 percent.

      The central bank has signalled that it will increase rates some more in a bid to contain the raging inflation in the country.

      With Statistics Canada revealing Wednesday (July 20) that inflation climbed 8.1 percent, which is the highest annual gain since January 1983, the question now is how much higher will the Bank of Canada go.

      Is a knockout blow coming to the Canadian real-estate market?

      James Orlando, director of economics with Toronto Dominion Bank or TD, wrote on July 20 that the central bank is “set to continue hiking its policy rate at an aggressive clip when it meets again in September”.

      “Markets are expecting upwards of 75 basis points from the BoC at its next meeting and see the policy rate ending the year between 3.5% and 3.75%,” Orlando stated.

      Orlando also noted that high inflation “continues to be the biggest risk to the economic outlook”.

      Moreover, year-on-year increases in prices are expected to be “uncomfortably elevated through 2022”.

      Bryan Yu is the chief economist of Central 1 Credit Union, the financial facility and umbrella organization of credit unions in B.C. and Ontario.

      Yu expects a more moderate increase in the Bank of Canada rate.

      Yu noted in a July 20 post that while Canadian inflation surged in June to 8.1 percent, which is “ridiculously high”, the increase was “weaker than consensus expectations” for an 8.4 percent increase.

      Hence, “momentum eased” on the inflation front.

      “The softer than expected headline print and easing commodity price provides some relief for July inflation and moves against another large interest rate hike from the Bank of Canada come September,” Yu noted.

      “That said,” Yu continued, “with inflation still very high, we can expect to see a 50- basis point hike at that meeting and we continue to pencil in a year- end rate of 3.25 per cent.”