How many more Bank of Canada hikes are likely in 2022?

The Bank of Canada’s decision to hike its policy rate for the first time since 2018 will grab headlines – but it was the “right move” and one that was in line with its January pronouncement, according to a prominent mortgage industry executive.

James Laird (pictured), RateHub.ca co-founder and CanWise Financial president told Canadian Mortgage Professional that the announcement contained no deviations from the Bank’s indication of its course in January, except for references to the Russia-Ukraine crisis that has escalated since then.

“I think it was the right move and except for the conflict [Russia’s invasion of Ukraine], it was a very close continuation of their January announcement,” he said. “They foreshadowed this in a lot of detail in January, and all of the exact themes continued except for Russia-Ukraine.”

The central bank noted in Wednesday’s statement that economies across the world were beginning to recover from COVID-19 setbacks earlier than anticipated, even despite the continued prevalence of the virus and possible emergence of further variants.

It also said that Canada’s economy had posted a stronger-than-expected performance in 2021’s fourth quarter, with economic growth of 6.7% showing that slack has largely been absorbed.

That’s set the stage for further Bank rate hikes throughout the year, with the annual rate of inflation – currently at its highest level for over 30 years – remaining a considerable concern. Laird said he expected four to six quarter-point benchmark rate increases during the 2022 calendar year.

Read more: Bank of Canada hikes rate

“Global and Canadian economic recovery is doing well. Slack in the labour market is quite low, so the labour market is strong. Omicron seems to have waned significantly, so most economies and businesses are now open with few restrictions,” he said.

“As [the Bank] said in January, they feel the need for ultra-low stimulus rate policy is over, and that theme continued. Throw in inflation, and it definitely looks like more rate hikes to come.”

Six quarter-point rate increases would restore the Bank rate to its pre-pandemic level, 150 basis points higher than the 0.25% it remained at for nearly two years.

Still, even a return to relative normality in Canada’s rate landscape wouldn’t necessarily temper activity hugely in the housing market, Laird said, with a host of considerations set to keep things busy for the foreseeable future.

“[Would] the rate being 1% higher at the end of the year change the market dynamic… to a buyer’s market? No. It’s a factor, but it’s one of many, and other factors are more material – most obviously supply and demand,” Laird said.

“There just aren’t enough houses, and demand from the existing population is strong. Immigration targets are [also] big, and those new Canadians are going to add to the demand side of the equation.”

The federal government recently revealed its intention to welcome record numbers of new Canadians in the next three years, with over 431,000 expected to arrive this year, followed by around 447,000 in 2023, and 451,000 in 2024.

Read more: Major banks hike prime rates

“This rate policy that we’re talking about, four to six rate increases. Does it take a few buyers out of the pool? Sure. But it doesn’t just change a hot housing market to a cold one,” Laird said.

The benchmark rate is closely tied to banks’ higher prime rate, with leading lenders including RBC, TD and BMO all indicating on Wednesday that they would hike those rates in line with the Bank of Canada decision.

Variable-rate mortgage payments, which are tied to the prime rate, will now increase following the Bank’s move – although Laird said that the spread between variable- and fixed-rate products was still sizeable enough that variable would remain an attractive option despite the hike.

“We still have this huge gap between fixed and variable - so even this week, when this rate hike was all but certain, variable rates are still very popular,” he pointed out. “We need five or six more rate hikes for the two rates to be equal and people [who choose variable] save money in the meantime.

“To me, the number-one dictator of popularity between fixed and variable is just the spread between the two. When it’s more than 1%, a lot of people will take the variable and when it’s less than 50 basis points, that’s when very few people take it.”