Pressured families hold their breath as BoC prepares for rate hikes

There’s little expectation of a rise in interest rates Wednesday but early 2022 could be very challenging some many Canadians

Pressured families hold their breath as BoC prepares for rate hikes
Steve Randall

As the Bank of Canada prepares to announce its latest interest rate decision and give some sense of direction on monetary policy, many Canadian families will be waiting nervously.

Their financial situations mean that any increases in rates will impact their standard of living including their ability to service debts and keep up with the rising cost of living.

Stats from insolvency firm MNP show that more than half of respondents to their quarterly survey are concerned about rate rises and 54% said they are worried about paying their bills as rates rise. This jumps to 65% among younger Canadians and 56% among women.

For younger people and those with a household income below $100K, the risk of being in financial trouble is the greatest but 4 in 10 of all respondents are concerned about this.

More than one third of respondents fear that interest rate increases could push them into bankruptcy. Again, younger people are most likely to say this.

However, almost half of young Canadians believe they are already feeling the effects of rate rises, even though there have not been any for some time and rates remain at historic lows.

Timescale for change

In the October decision day announcement (Oct. 27, 2021) there is little expectation that the BoC will change rates.

More likely is the halving of the bank’s bond buying program, currently at $2 billion a week. It has curbed this stimulus measure several times already since it was first introduced early in the pandemic.

But the careful balance between rising inflation and interest rates is unlikely to mean Governor Tiff Macklem will sit tight for long. Expectation for a rate rise in spring 2022 is growing.

“Inflation is more powerful than policymakers believed a few months ago,” Doug Porter, chief economist at Bank of Montreal told Bloomberg. “The world has changed, and I think policy has changed.”

However, although many commentators believe that the central bank will need to act early next year – and markets are beginning to price that in - the governor is likely to reinforce current policy that rates will be on hold until economic slack is tightened in the second half of 2022.

“We don’t see the bank validating the recent move higher in interest rate expectations, instead maintaining its guidance that it will keep the overnight rate steady until economic slack is absorbed in the second half of 2022,” Josh Nye, an economist at RBC told Bloomberg.