The central bank's rate moves have recently drawn the ire of some mortgage professionals
The Bank of Canada’s rapid series of interest rate hikes over the past year does not appear to have found favour among sections of the Canadian mortgage broker and agent community, with one prominent Ontario-based agent suggesting that borrowers were deceived by the central bank’s rhetoric on rates at the height of the COVID-19 pandemic.
In November 2020, the Bank’s governor Tiff Macklem told the House of Commons standing committee of finance that he was making it “very clear: Canadians can be confident that borrowing costs are going to remain very low for a very long time.”
Just over 15 months later, the central bank hiked its benchmark rate by 25 basis points, a move that opened the door to seven further rapid-fire increases that saw that rate jump from 0.25% to 4.5% – and that’s a set of decisions that has had profound consequences for a large number of Canadian borrowers, Monica Chrysler (pictured top), agent and lead planner at Sherwood Mortgage Group, told Canadian Mortgage Professional.
She said Canadians had been “lied to” by the Bank over its confidence that interest rates would stay resolutely low.
“Within a year, prime rate and fixed rates have now more than doubled,” she said. “They are squeezing Canadians to pay high amounts of bank interest to replenish their excessive cost of spending and over $2 trillion of current debt. It’s outrageous, and Canadians are suffering.”
Combined federal and provincial debt in Canada is slated to exceed $2 trillion in 2022/23, according to the Fraser Institute public policy think tank. The Bank of Canada, meanwhile, recorded a $522 million loss in 2022’s third quarter, the first quarterly loss in its 87-year history.
Chrysler said she believed the Bank should focus on lowering its benchmark rate and address its spending in other areas, and added that higher interest rates had negated the purpose of the mortgage qualifying rate.
“What was the point of the government stress test, qualifying Canadian mortgages at 4.79% in 2020, only to end up with interest rates that have now passed this threshold rate?” she said.
The current mortgage stress test requires borrowers to qualify at a rate of either 5.25% or two percentage points above the contract rate, whichever is higher, although the latter almost always applies to borrowers in today’s higher-rate environment.
When will the Bank of Canada cut rates?
Chrysler said she didn’t foresee rates dropping in the foreseeable future, with 2023 likely to see the benchmark rate remaining at its current level.
“I believe they will start to decrease the rates in 2024 to 2024. However, I’m very hopeful they’ll decrease the rates this year as Canadians have suffered enough,” she said. “Almost 70% of Canadians are homeowners, and I do see a lot of new developments in my area, so I will remain hopeful that [the Bank] will do the right thing.”
She said she had fielded calls from clients who started off with a 1.4% variable rate in 2020 and have seen their rate of interest surge to 5.65%. “They are struggling and very discouraged with the interest rates,” she said. “In 2020 and 2021, I mailed out a personal letter to my entire database stating that the fixed rates were at a historic low and encouraged them to lock in and connect me anytime.
“Unfortunately, the rate increase happened so fast, many people were not able to act on it and are now left shocked at how dramatically the rate has changed.”
Did the Bank of Canada have any other option on rate hikes?
Prominent economists have argued that an economic whirlwind caused by the emergence of new COVID-19 variants at the beginning of 2022 and Russia’s invasion of Ukraine saw inflation surge and left the Bank of Canada with little choice but to hike its benchmark rate.
CIBC’s Benjamin Tal told CMP that those unexpected developments “were not in the system” and made it “very difficult to blame the Bank of Canada at this point,” while BMO’s Benjamin Reitzes described Macklem’s remark as “a regrettable statement with hindsight” but one that appeared reasonable before those new inflationary factors arrived.
Macklem, meanwhile, emphasized the importance of bringing inflation back under control in a recent interview with CTV and noted that “once we get inflation down, we can resume sustainable growth and things can get back to normal.”
What are your thoughts on the Bank of Canada’s rhetoric and whether it was right or wrong to claim rates would remain low for a long time? Let us know in the comments section below.
