CIBC says the central bank’s rate increase in September will end the hike cycle

According to the recent report by CIBC’s economists Benjamin Tal and Karyne Charbonneau, the Bank of Canada will raise its key lending rate by 0.75% next week and finish the hike cycle. As a result, the overnight target rate will stop at 3.25% “for the duration of 2023.”

In their opinion, the 5-year bond yield will reach 2.45% in 2022 and 2.3% in 2023, which translates to almost $19 billion of additional debt payments this year.

“Out of the total household debt of $2.7 trillion, about $650 billion (24%) face a real increase in interest payment in 2022,” – the noted. “The real changes are taking place right now, and for a generation of Canadians who have never dealt with high borrowing costs, it’s an actual challenge.”

They say although interest rates remain relatively low from historical point of view, “the entire pool of household debt was taken out in a low-interest rate environment.”

“Combine it with a record high inflation rate and you’ll get a serious reason to worry about the ability of consumers to sustain the national economy,” – they pointed. “The sharp accumulation of mortgage debt in the years before the pandemic, and even faster accumulation during the pandemic, means that households are more vulnerable now to growing rates than in the past.”

The economists say a 1% rate increase today is equivalent to a 1.5% hike in 2004, when it comes to affecting mortgage interest payments.

At the same time, they noted that almost $300 billion in excess savings accumulated during the pandemic will provide a buffer against higher interest rates, especially as these excess savings are still growing.

Although CIBC doesn’t predict any rate increases next year, it also doesn’t believe the BoC will start reducing rates earlier than in 2024.

“All things considered, the heavier burden of growing rates and the deterioration of spending power caused by inflation will significantly slow consumption. However, Canadian households are prepared to keep the consumption growth at a level that could allow the BoC not to ease the police in 2023,” – they added.

 

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