The Bank of Canada has just hiked its interest rate by another 25 points to five per cent — the second quarter-point hike since June’s interest rate increase to 4.75 per cent. The central bank has been steadily increasing interest rates over the past three years in an effort to tame inflation.
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Here’s how the Bank of Canada’s interest rate hike to 5 per cent will impact Canadian households
The Canadian economy grew at 3.1 per cent in the first quarter of 2023, fuelled by strong growth in household spending on services. Healthy economic growth goes hand-in-hand with job creation, leading to tighter labour markets where job openings are plentiful but available workers are scarce.
Mortgage owners beware
For businesses and households, the latest interest rate increase means an increase to the prime rate, which is the interest rate banks charge their customers with. The current prime rate is 6.95 per cent, up from 3.70 per cent in June 2022.
Homeowners with variable mortgage rates and terms about to expire will feel the most pain from the rate hike. At higher interest rates, borrowers need to allocate a larger share of their disposable income to debt, leaving less for spending on food and other household necessities.
Fortunately, price growth has slowed for some categories, such as durable goods which includes automobiles and furniture. And the price of cellular services has decreased by 8.2 per cent over the past year.
On a more positive note, Canadian households, and the housing market, have remained resilient despite some fluctuations over the past year.
According to a recent Canada Mortgage and Housing Corporation (CMHC) report, the number of mortgages in arrears has remained low despite more households being worried about making mortgage payments on time. The relatively low number of mortgages in arrears is reflective of the financial stability and resiliency of Canadian households.
Coping with higher mortgage rates
One way Canadians have been coping with higher mortgage rates is with choosing shorter-term fixed-rate mortgages. Fixed-rate terms between one and five years have become the preferred choice, reflecting borrower expectations that the interest rates will fall within the next few years.
In fact, less than 15 per cent of new mortgages are locked in for fixed-rate five year terms, and less than 20 per cent are variable rate. Prior to August 2022, fixed-rate terms of five years or longer were the preferred choice for mortgage borrowers.
Another way households are coping with higher interest rates is by increasing amortization periods — the length of time people have to pay back a loan — to reduce monthly debt servicing costs. Extending amortization periods can prevent homeowners from missing mortage payments.
With the interest rate hike, this trend is expected to continue as households facing higher mortgage payments look for ways to reduce their monthly expenditures. When the interest rates fall, the trend is expected to reverse.
Credit and loans
Those with secured or unsecured lines of credit will also be impacted by the rate increase, since the interest rates for those products are directly related to the prime rate.
Finder, a financial comparison website, reports an average interest rate of 6.37 per cent for secured personal line of credit and 9.83 per cent for unsecured line of credit, with precise rates varying with credit scores and personal characteristics.
Those taking out a new automobile loan will also face higher interest rates. Most automobile loans are fixed rate, so those in need of refinancing or renegotiating their loans are likely to be impacted.
Smoother roads ahead?
While the downward trend in inflation suggests the Bank of Canada’s interest rate hikes may be soon coming to an end, we can expect the current interest rate to remain constant at least for the rest of the year.
The next inflation update will be announced on July 18.
At this point, it appears that the Canadian economy has picked up enough momentum this year to dodge a recession. We can expect both inflation and interest rates to soften in 2024.
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TORONTO – Roots Corp. may have built its brand on all things comfy and cosy, but its CEO says activewear is now “really becoming a core part” of the brand.
The category, which at Roots spans leggings, tracksuits, sports bras and bike shorts, has seen such sustained double-digit growth that Meghan Roach plans to make it a key part of the business’ future.
“It’s an area … you will see us continue to expand upon,” she told analysts on a Friday call.
The Toronto-based retailer’s push into activewear has taken shape over many years and included several turns as the official designer and supplier of Team Canada’s Olympic uniform.
But consumers have had plenty of choice when it comes to workout gear and other apparel suited to their sporting needs. On top of the slew of athletic brands like Nike and Adidas, shoppers have also gravitated toward Lululemon Athletica Inc., Alo and Vuori, ramping up competition in the activewear category.
Roach feels Roots’ toehold in the category stems from the fit, feel and following its merchandise has cultivated.
“Our product really resonates with (shoppers) because you can wear it through multiple different use cases and occasions,” she said.
“We’ve been seeing customers come back again and again for some of these core products in our activewear collection.”
Her remarks came the same day as Roots revealed it lost $5.2 million in its latest quarter compared with a loss of $5.3 million in the same quarter last year.
The company said the second-quarter loss amounted to 13 cents per diluted share for the quarter ended Aug. 3, the same as a year earlier.
In presenting the results, Roach reminded analysts that the first half of the year is usually “seasonally small,” representing just 30 per cent of the company’s annual sales.
Sales for the second quarter totalled $47.7 million, down from $49.4 million in the same quarter last year.
The move lower came as direct-to-consumer sales amounted to $36.4 million, down from $37.1 million a year earlier, as comparable sales edged down 0.2 per cent.
The numbers reflect the fact that Roots continued to grapple with inventory challenges in the company’s Cooper fleece line that first cropped up in its previous quarter.
Roots recently began to use artificial intelligence to assist with daily inventory replenishments and said more tools helping with allocation will go live in the next quarter.
Beyond that time period, the company intends to keep exploring AI and renovate more of its stores.
It will also re-evaluate its design ranks.
Roots announced Friday that chief product officer Karuna Scheinfeld has stepped down.
Rather than fill the role, the company plans to hire senior level design talent with international experience in the outdoor and activewear sectors who will take on tasks previously done by the chief product officer.
This report by The Canadian Press was first published Sept. 13, 2024.
Companies in this story: (TSX:ROOT)
The Canadian Press. All rights reserved.
VANCOUVER – Mediated talks between the union representing HandyDART workers in Metro Vancouver and its employer, Transdev, are set to resume today as a strike that has stopped most services drags into a second week.
No timeline has been set for the length of the negotiations, but Joe McCann, president of the Amalgamated Transit Union Local 1724, says they are willing to stay there as long as it takes, even if talks drag on all night.
About 600 employees of the door-to-door transit service for people unable to navigate the conventional transit system have been on strike since last Tuesday, pausing service for all but essential medical trips.
Hundreds of drivers rallied outside TransLink’s head office earlier this week, calling for the transportation provider to intervene in the dispute with Transdev, which was contracted to oversee HandyDART service.
Transdev said earlier this week that it will provide a reply to the union’s latest proposal on Thursday.
A statement from the company said it “strongly believes” that their employees deserve fair wages, and that a fair contract “must balance the needs of their employees, clients and taxpayers.”
This report by The Canadian Press was first published Sept. 12, 2024.
The Canadian Press. All rights reserved.
MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.
The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.
The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.
This report by The Canadian Press was first published Sept. 12, 2024.
Companies in this story: (TSX:TRZ)
The Canadian Press. All rights reserved.
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