Canada mortgage costs – what happens next?

With the Bank of Canada recently announcing that it will be keeping the policy rate on hold at its current level of 4.5% for a prolonged period, mortgage interest costs are likely to reach a peak and then go into a steep decline during the second half 2023, according to Stephen Brown of Capital Economics.

In an interview with Bloomberg News, Brown said that this is the main reason why the BoC won’t need to follow the US Federal Reserve’s lead when it comes to further hikes this year.

“One way Canada actually stands out from a lot of other countries is that when the Bank of Canada raises interest rates, there’s a temporary boost to inflation because of this mortgage interest rate effect,” Brown said.

Brown added that the resulting cooldown in the housing market would lead to weaker price pressures over much of the year — serving as a prelude to the easing of Canadian inflation, which stood at 6.3% in December.

Brown projected that increases in the shelter component of the Canadian consumer price index will decelerate to 3.5% by mid-2023, and then further slow down to 1.5% by the end of the year.

Rishi Mishra, of Futures First Canada Inc., said that taking these trends into account, any further BoC hikes are unlikely for the foreseeable future.

“The bank might be feeling like they’ve done enough on housing, and that the effect is going to unravel over the coming months,” Mishra told Bloomberg. “They don’t want to press down too hard, just because how large the exposure is to the housing market in Canada.”