Markets are expecting a 50/50 chance of another increase this month
An expected Bank of Canada rate hike this month would add a significant burden on over-leveraged borrowers, according to Kambiz Kazemi, chief investment officer at Validus Risk Management.
“The risk we have highlighted a number of times is regarding the leverage of the households,” Kazemi said in an interview with BNN Bloomberg.
“If we raise another, in our view, 50 basis points, we’ll be at 80% of triggers on the variable mortgages — so that’s a very high number.”
Kazemi said that the current unemployment rate of 5.2%, which rose for the first time since August 2022, should be considered as a red flag despite economists’ reassurances that the loss of 17,300 jobs in May was relatively minor.
“If the unemployment market starts showing more weakness then essentially, yes, you can have more of a downside and surprise everybody on the abruptness of it,” he said.
Markets are expecting a 50/50 chance of another hike on the Bank of Canada’s next policy announcement on June 12.
Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce, is among those who believe that the central bank is “not taking any chances” when it comes to using the interest rate as a blunt tool against inflation.
The BoC policy rate is currently at 4.75%.
“It’s very possible that we are in the early stages of overshooting because remember – a lot of [economic] indicators are lagging indicators,” Tal told Canadian Mortgage Professional recently. “The Bank of Canada simply will not take a chance. If you give them a choice – a recession versus inflation rising – they will go with a recession any day.”
