BoC asks Canadians to Prepare for Higher Rates

The Bank of Canada has conveyed that the era of exceptionally low interest rates appears to be coming to an end, and it has cautioned both businesses and households to prepare for increased borrowing costs. Throughout the pandemic, the central bank maintained its policy rate at historically low levels, but it has since embarked on a series of rate hikes in response to mounting inflation.

The policy rate, which had hovered at 0.25% during the pandemic, has now reached a 22-year peak of 5.0%. The Bank of Canada executed ten interest rate hikes between March 2022 and July 2023 to combat inflation, which had surged to over 8% last year.

Senior Deputy Governor Carolyn Rogers underscored the necessity of adapting to a future characterised by potentially higher interest rates than what has been experienced in the past 15 years.

Although the central bank chose to keep rates unchanged last month, it signalled its readiness to implement further rate hikes if deemed necessary. The bank’s projection is that inflation will gradually recede, with the 2% target only expected to be reached by the close of 2025.

An increasing number of households are encountering challenges in managing existing debt, as delinquency rates on credit cards, car loans, and unsecured lines of credit have either matched or slightly exceeded pre-pandemic levels. For mortgage holders, the prospect of renewing fixed-rate mortgages by the end of 2026 could translate to substantially higher payments.

While there is speculation about potential future interest rate reductions, the Bank of Canada has not indicated any intention for such cuts. This would hinge on inflation moving closer to its 2% target.

In sum, the Bank of Canada’s message emphasises the need for businesses and households to anticipate and prepare for interest rates that are higher than what they have grown accustomed to in recent years, given the prevailing economic and inflationary conditions. However, economists and money markets anticipate that the central bank will commence a phase of interest rate reduction in the coming months. The precise timing of this adjustment will hinge on the trajectory of inflation and other economic determinants.