What the BoC’s rate hikes mean for you, your investments and the economy

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The Bank of Canada is expected to pull the trigger on Wednesday on the first of several interest rate hikes scheduled for this year. If not, many will be looking for answers as to why the central bank hesitated and when the take-off will occur.

On Monday morning, Bloomberg data indicated that the market had forecast up to seven rate hikes by the end of the year, which would take the overnight rate to 2.00%.

The Bank of Canada’s key interest rate affects almost every aspect of life, whether it’s your personal finances, your investment portfolio or the economy in general. Experts explain how they think key rate-sensitive areas will be affected.

INFLATION

The Bank of Canada has warned it will let inflation run hot for a while as the economy recovers from the COVID-19 pandemic – and individuals and businesses have felt the pinch.

But a single rate hike won’t be enough to bring inflation under control, according to Jennifer Lee, senior economist at BMO Capital Markets. She expects the bank to increase four times this year, starting in March.

“It’s going to take time, of course, for everything to be taken into account,” she said in an interview. “We hope that will start to stem the very high rate of inflation that we are seeing.”

Looking at Canada’s economy as a whole, Lee said higher rates would lead to lower growth, but still expects gross domestic product to rise 4% this year.

“[This year’s GDP forecast is] down from last year’s growth rate of 4.5%; but you don’t want anything overheating, which is why the Bank of Canada should raise rates now, especially when you look at the housing sector,” she said.

MORTGAGES

When a homeowner feels the pressure of higher interest rates depends on whether they have a variable or fixed rate loan.

“The impact on variable rates is direct in that if the Bank of Canada increases by 1.25%, we should expect the prime rate to increase by exactly the same amount. So the most obvious impact is on those who currently have a variable rate,” said James Laird, co-founder of rate comparison website Ratehub.ca, in an interview.

“They should expect their rate, and therefore their payment, to rise as the Bank of Canada raises interest rates.”

Meanwhile, homeowners with a fixed rate mortgage will face higher rates when refinancing.

Laird wouldn’t necessarily tell homeowners they should lock in their variable rate, but “it’s a consideration.”

“The variable rates that are available today or that people are already in are significantly lower than the fixed rates available today. So as always, variable rates start out cheaper – they carry more risk and volatility, but floating rate has proven to be a great strategy for years and years,” he said.

Finally, Laird has two tips for Canadians looking to buy a home in the coming months: Lock in a pre-approved mortgage rate while they shop for a home, and budget for higher interest rates in the future.

LODGING

While higher borrowing rates are going to take some of the pressure off Canadian housing markets, Robert Hogue, senior economist at RBC Economics, said he thinks they’re likely to have only a marginal cooling.

He also said the impact is unlikely to be felt until the second half of this year as immigration and limited supply will continue to be dominant factors.

“We expect many more newcomers looking for accommodation, whether rented or purchased, so we will need more accommodation. Demand pressure could still persist. So ultimately interest rate hikes might cool the market, but there are other factors at play as well,” he said.

RBC Economics predicts three rate hikes from the Bank of Canada in 2022 and three more next year.

In rural housing markets, Hogue said he thinks the shift to remote working and the search for affordability could offset some of the chilling effect of rising rates.

BANKING SHARES

The impact of rate hikes on Canadian banks is two-fold, says Bryden Teich, partner and portfolio manager at Avenue Investment Management.

While banks would benefit from an expansion in net interest margin, the economic slowdown caused by higher borrowing rates could work against them.

“When you look at where the banks are — at all-time highs — they’ve gone up massively over the last two months,” Teich said. “I look at the banks and I actually think a lot of the optimism from the rate hike cycle is already priced in.”

The rally now makes him wonder if they are fully valued.

“If I were to look around the corner for the next 12 months, I think the rambling cycle we’re about to begin is going to slow the economy much faster than people realize; So I’m starting to worry about the risk of a recession over the next 12 to 18 months. With bank stocks at record highs, none of that is factored in,” he said.

TECHNICAL STOCKS

The once high-flying tech sector has taken a major turnaround in recent months, largely as investors have fled high-multiple-value stocks. A great Canadian tech example would be Shopify Inc., which has seen its share price halve since its peak in mid-November.

“You have an environment where rates are rising, very multiple technology stocks are going to be under pressure in that type of environment, so it’s no surprise to see Shopify being so impacted,” Teich said.

However, with tech stocks falling, he thinks investors should pull out their shopping list and start positioning themselves in quality tech companies.

“I would be alleviating the banks and looking at the tech companies,” he said.

REAL ESTATE INVESTMENT TRUSTS

Similar to what RBC’s Robert Hogue said of the housing market, Teich also doesn’t see rising interest rates becoming a major drag on real estate.

“I think we’re at the point in the cycle where raising rates from the bottom isn’t so detrimental to real estate,” Teich said.

“The only place we have parked our investments on the REIT side is in residential apartment REITs. We think the rental market is quite attractive here and I think some Canadian apartment REITs are doing a great job. It’s one side of the REIT spectrum that we own. The other side is something like [the grocery-anchored] Choice Properties REIT,” he said.

However, he warned that investors need to choose their place in the REIT sector as he believes some areas, such as the residential sector, are poised to fare better than the retail and office markets. amid continued COVID-related uncertainty.

LOONIE

Generally, higher interest rates would mean a stronger Canadian dollar, but there are other factors – like US monetary policy – ​​at play that could lead to a weaker loonie by the end of the year. year,” said Bipan Rai, head of North American currency strategy at CIBC Capital Markets.

With at least four rate hikes now scheduled for the U.S. Fed this year, “this really reduces any form of upside pressure on the Canadian dollar,” he said.

He predicts the loonie will end 2022 at 77 cents US, while noting that there will likely be a lot of volatility along the way.

“What I pay more attention to is not so much what interest rates do in 2022, but what we see beyond 2022 in 2023 and 2024,” Rai said.

“What we expect is that the market will be a bit more aggressive on rate hikes in the United States for these years than in Canada – and that should weaken the Canadian dollar overall over the course of the second half of this year.”

A major factor that would pose upside risk to the loonie, he said, would be strengthening oil prices.

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