Economists forecast rates will jump by another half percentage point next week — cooling Canada’s housing market even more

The Bank of Canada is widely expected to hike interest rates again next week as part of an ongoing effort to curb consumer prices and cool Canada's overheated housing market.

With inflation reaching a 31-year high of 6.8 per cent in April, Bay Street analysts broadly expect that governor Tiff Macklem and his team of economists will raise the central bank's overnight interest rate by another 0.5 of a percentage point on Wednesday, increasing the current rate from one per cent to 1.5 per cent.

Those rates may seem tame relative to historical standards - the central bank's interest rates typically sat above two per cent until the 2008 financial crisis - but the pace at which rates are being hiked is the fastest in more than two decades, part of an aggressive campaign to slow consumer demand and control inflation.

In April, the Bank of Canada increased its prime interest rate from 0.5 per cent to one per cent - the largest hike since 2000.

Already, the impact of the bank's tightening campaign can be seen in the housing market, where prices fell about 12 per cent in April, according to the Canadian Real Estate Association.

The higher the rates, the harder it is to borrow money, meaning prospective homebuyers will find it harder to get financing for down payments while current homeowners pay more on their mortgages.

The expected rate hike will have a further cooling effect on both the number of real estate transactions and prices across the country," said James Laird, co-founder of ratehub.ca.

The central bank is also expected to continue hiking rates for the rest of the year, but at a slower pace if central bankers see inflation cooling.

Josh Nye, senior economist at the Royal Bank of Canada, said he anticipates rate hikes in June and again in July that would raise the bank rate to two per cent.

After that, RBC forecasts another two hikes of 0.25 per cent in September and October, bringing the rate to 2.5 per cent by the end of 2022, though other economists expect rates could rise as high as three per cent by year's end.

The Bank of Canada is laser-focused on inflation right now but once monetary policy gets toward a more neutral level they'll have to strike more of a balance between prolonging the economic cycle and getting inflation quickly back to target," said Nye.

Anyone with a variable rate mortgage should understand what their payment will be with a 50-basis-point increase next week, and they should budget for additional rate increases totalling one to two per cent for the remainder of the year," said Laird.

According to ratehub.ca, their mortgage payment calculator shows a homeowner who put a 10 per cent down payment on a $750,000 home with a five-year variable rate of 1.90 per cent, amortized over 25 years, has a monthly mortgage payment of $2,913.

Should the central bank announce a 0.5 per cent increase next week, that homeowner's variable mortgage rate will increase to 2.40 per cent, and their monthly payment will increase to $3,083.

This means that the homeowner will pay $170 more per month, or $2,040 per year, on their mortgage payments.

While a higher hike may feel like a real squeeze to homeowners now, it may mean more tempered increases for the rest of the year," said Leah Zlatkin, a mortgage broker and analyst with LowestRates.ca.

Typically, interest rate hikes do not affect credit card rates - unless consumers miss their monthly minimum payments. In those instances, credit card companies can increase interest rates by five per cent or more.

In a speech in Montreal this month, deputy governor Toni Gravelle said the central bank's policy rate is still too stimulative."

Rising interest rates are designed to slow the economy by making borrowing more expensive. That tends to slow sectors like housing," said Gravelle.

But this slowing might be amplified this time around because highly indebted households will face high debt-servicing costs and will likely reduce household spending more than they would have otherwise."

Jacob Lorinc is a Toronto-based reporter covering business for the Star. Reach him via email: jlorinc@thestar.ca