No respite for the indebted: Bank of Canada will raise key rate further

No respite for the indebted: Bank of Canada will raise key rate further

The Bank of Canada raises its key rate for the sixth time this year on Wednesday. While consumers suffer, banks benefit.

Consumers will have to pay more for their mortgages and lines of credit. The Bank of Canada’s key rate will rise between 0.5 and 0.75 percentage points on Wednesday, according to experts, bringing it to around 4%. Unprecedented since the 2008 financial crisis.

For many indebted, this increase will be the straw that breaks the camel’s back. “It’s clear!” says Jean-Philippe Saumure, senior advisor at Equifax Canada. “The number of consumers who missed at least one payment on their debts increased by 100,000 from the same quarter in 2021. And that number was before the 0.75% spike in early September,” he specifies.

During COVID, households spent less and took advantage of government programs, which had the effect of lowering their debt levels. During this period, the average indebtedness in home equity lines of credit increased from more than $70,000 to almost $66,000 in the country, says Jean-Philippe Saumure.

“But since last year a record number of credit cards have been put on the market and the limits of the lines of credit granted by financial institutions are breaking records. By 2023, crime rates are expected to return to pre-pandemic levels and continue to rise,” he says.

SMEs will know too

For a home, a $300,000 mortgage at an interest rate of 1.5% in early 2022 required payments of $1,200 per month. Today, after five rate increases, that same payment is $1,660, estimates Stéphane Bruyère, mortgage broker at Mortgage Architects. “If we add tomorrow’s increase, assuming three-quarters of a point, it goes up to $1,787, so a payment that has increased by $587 per month. In less than a year!”

The impact on SMEs should not be overlooked, he said. Corporate margins, which also vary with the key rate, are now around 10%. “And on Wednesday I risk being at 10.75%. What will companies do if they want to innovate or invest? It is the entire lining of the Canadian economy that moves with interest rates, not just individuals,” he said.

Banks take advantage

Interest rate hikes benefit at least one group: banks. “Bank liabilities are financial deposits, such as your and me checking or savings accounts. But we only get crumbs in interest! Regardless of the movement in the key rate, the rate that banks pay to creditors, that is, to us, remains practically the same”, explains Valeri Sokolovski, professor of finance at HEC Montreal. “On the other hand, mortgages and lines of credit go up the next day. A 1% increase in the interest rate is a 1% increase in bank profits,” he said.

However, raising the key rate could increase the funding cost for banks, especially in the case of interbank lending, he said.

A YEAR OF INCREASES


CANADA-CENBANK/

Freeland rejects criticism of the Bank

Finance Minister Chrystia Freeland came out in defense of the Bank of Canada on Tuesday. She reiterated her independence and stressed that it was vital that this institution remain free from political influence.

The Bank is trying to curb inflation. Its purpose is to control prices and stabilize the purchasing power of the dollar. That is why he went there with six interest rate increases in 2022, the minister estimates.

rain of criticism

Conservatives have been criticizing the Bank of Canada for several months, particularly its government bond purchase program. They make the Bank primarily responsible for rising inflation in Canada, calling it an “ATM” for the government.

New Democrat leader Jagmeet Singh also recently accused the Bank of having caused the “impending recession” in part by using “overly aggressive measures”.

Both leaders miss the mark, according to assistant professor of finance at HEC Montreal Valeri Sokolovski. “Inflation is global.

All central banks have increased the money supply. They printed a lot of money and it is difficult, if not impossible, for a single central bank to control global inflation,” he said.


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