There could be bad news for anyone with a mortgage this week, as speculation is growing that the Bank of Canada is getting ready to start raising lending rates again.
After hiking its benchmark interest rate repeatedly in a bid to rein in runaway inflation, the central bank hit pause on hikes in January, saying it needed time to gauge the impact on the economy.
That pause, though a strong indication the bank hoped the battle had been won, was anything but certain, as central bank governor Tiff Macklem made clear in a speech soon after the decision.
“This pause is conditional,” he said. “It depends on whether the economy develops as we think it will and whether inflation continues to fall.”
Since then, a number of data points have come out suggesting that those conditions are no longer being met, as Canada’s economy is still running hotter than the central bank would like — perhaps even by enough to compel Macklem to step off the sidelines once again.
Economy is heating up
Canada’s economy expanded at a 3.1 per cent annual pace in the first quarter, Statistics Canada said last week. That’s far more than what the central bank was forecasting when it took its foot off the brake.
That stronger than expected GDP number came on the heels of inflation data for March that showed the country’s inflation rate inched up in April to 4.4 per cent. That was a reversal after nine straight monthly declines.
Stronger than expected output and an inflation suddenly trending in the wrong direction would ordinarily be the sort of thing that might compel a central bank to step in and cool things down.
Investors certainly seem to think there’s a chance. Trading in investments known as swaps, which bet on future central bank rates, imply there’s about a 40 per cent chance of a small hike in the central bank’s rate on Wednesday, taking it to 4.75 per cent.
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That’s bad news for anyone with a mortgage, as lending rates that have also soared this year will be poised to go even higher.
Ron Butler, a Toronto-based mortgage broker, says variable rate mortgages have borne the brunt of the damage from rate hikes so far, and if the central bank decides more are needed, the impact would be dramatic and immediate.
“In many ways, for the people with variable rates it could … be the last straw and force them to have to take really drastic action,” he said in an interview.
Despite the dramatic rise in lending rates so far, only a small percentage of borrowers have actually felt their payments increase, since fixed rate borrowers tend to lock in for several years at a time, and even most variable rate loans have fixed payments that simply add years to the loan instead of increasing the payment when rates rise.
Regardless of what the central bank does this week, the market has moved into a new normal of higher rates, and it’s a slow moving wave that will keep hitting people as they renew or buy for years to come.
“There’s going to be no more 2.49 rates, no more 2.99 rates,” he said. “Maybe a rate that starts with a three but mostly a rate that starts with a four will become the new normal for people, and it will be really hard for Canadians to afford houses in the major cities.”
Butler says the cost of carrying a $500,000 mortgage has already gone up by $1,131 a month in the current cycle — and that’s before any more raises that may come this week.
“That’s a significant impact on anybody,” he said. “Their payments are big and in one or two years they’re going to be faced with, who knows, hopefully a lower rate, but perhaps even a higher rate.”
Steven Lawrence and his husband live in their two-bedroom Vancouver condo with their two-year-old. Lawrence says every extra cent they have is going towards paying off their new mortgage rate. (Nicholas Allan/CBC)
That’s the exact scenario that homeowner Steven Lawrence was hoping to avoid.
Lawrence and his husband have owned a two-bedroom condo in Vancouver for almost a decade, on a fixed rate loan charging 2.8 per cent. But that loan was up for renewal at the end of May, a major source of anxiety in the home as the pair were faced with rates of six per cent and above in some cases.
They ended up locking in at a rate of just over 4.8 per cent for three years, a loan that will cost them an extra $856 every month. With a two year old’s child-care bills to pay for, Lawrence says their mortgage will gobble up every cent of wiggle room they got from the introduction of subsidized daycare earlier this year, but it was worth it for the peace of mind.
“It’s definitely not ideal, but it’s … doable,” he told CBC News in an interview. “I mean, I’d prefer $850 to be going to vacations or stuff for my baby [but] at least I don’t have to watch if an interest rate hike happens.”
“I’m sure there’s millions of other Canadians that are in the same boat or or are going to be in the same boat over the next coming years if interest rates stay this high.”
If not now, then soon
About a half dozen economists who follow the central bank think it may nudge up its rate on Wednesday, but even those who don’t think one is coming this week agree there’s likely to be another one at some point this year.
Derek Holt, an economist with Scotiabank, is among those who thinks the time is now, for the simple reason that the conditions the bank laid out for pausing have not been met.
“The Bank of Canada has been fairly clear that its conditional hold since January relied upon developments conforming to its expectations,” Holt said. “That clearly has not been the case.”
That’s bad news for anyone with a mortgage, but Holt says the alternative would be even worse for everyone — including the Bank of Canada.
“Time is very much of the essence here. With each passing month that households, businesses and governments bear witness to out of control inflation … faith in the [bank’s] ability to control inflation expectations will suffer and they may never be able to get inflation under control. Decisive action should have already been delivered, but further delay until July only to disappear for August holidays would lose precious time to send a concrete message,” Holt said.
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.
Dollarama Inc.’s food aisles may have expanded far beyond sweet treats or piles of gum by the checkout counter in recent years, but its chief executive maintains his company is “not in the grocery business,” even if it’s keeping an eye on the sector.
“It’s just one small part of our store,” Neil Rossy told analysts on a Wednesday call, where he was questioned about the company’s food merchandise and rivals playing in the same space.
“We will keep an eye on all retailers — like all retailers keep an eye on us — to make sure that we’re competitive and we understand what’s out there.”
Over the last decade and as consumers have more recently sought deals, Dollarama’s food merchandise has expanded to include bread and pantry staples like cereal, rice and pasta sold at prices on par or below supermarkets.
However, the competition in the discount segment of the market Dollarama operates in intensified recently when the country’s biggest grocery chain began piloting a new ultra-discount store.
The No Name stores being tested by Loblaw Cos. Ltd. in Windsor, St. Catharines and Brockville, Ont., are billed as 20 per cent cheaper than discount retail competitors including No Frills. The grocery giant is able to offer such cost savings by relying on a smaller store footprint, fewer chilled products and a hearty range of No Name merchandise.
Though Rossy brushed off notions that his company is a supermarket challenger, grocers aren’t off his radar.
“All retailers in Canada are realistic about the fact that everyone is everyone’s competition on any given item or category,” he said.
Rossy declined to reveal how much of the chain’s sales would overlap with Loblaw or the food category, arguing the vast variety of items Dollarama sells is its strength rather than its grocery products alone.
“What makes Dollarama Dollarama is a very wide assortment of different departments that somewhat represent the old five-and-dime local convenience store,” he said.
The breadth of Dollarama’s offerings helped carry the company to a second-quarter profit of $285.9 million, up from $245.8 million in the same quarter last year as its sales rose 7.4 per cent.
The retailer said Wednesday the profit amounted to $1.02 per diluted share for the 13-week period ended July 28, up from 86 cents per diluted share a year earlier.
The period the quarter covers includes the start of summer, when Rossy said the weather was “terrible.”
“The weather got slightly better towards the end of the summer and our sales certainly increased, but not enough to make up for the season’s horrible start,” he said.
Sales totalled $1.56 billion for the quarter, up from $1.46 billion in the same quarter last year.
Comparable store sales, a key metric for retailers, increased 4.7 per cent, while the average transaction was down2.2 per cent and traffic was up seven per cent, RBC analyst Irene Nattel pointed out.
She told investors in a note that the numbers reflect “solid demand as cautious consumers focus on core consumables and everyday essentials.”
Analysts have attributed such behaviour to interest rates that have been slow to drop and high prices of key consumer goods, which are weighing on household budgets.
To cope, many Canadians have spent more time seeking deals, trading down to more affordable brands and forgoing small luxuries they would treat themselves to in better economic times.
“When people feel squeezed, they tend to shy away from discretionary, focus on the basics,” Rossy said. “When people are feeling good about their wallet, they tend to be more lax about the basics and more willing to spend on discretionary.”
The current economic situation has drawn in not just the average Canadian looking to save a buck or two, but also wealthier consumers.
“When the entire economy is feeling slightly squeezed, we get more consumers who might not have to or want to shop at a Dollarama generally or who enjoy shopping at a Dollarama but have the luxury of not having to worry about the price in some other store that they happen to be standing in that has those goods,” Rossy said.
“Well, when times are tougher, they’ll consider the extra five minutes to go to the store next door.”
This report by The Canadian Press was first published Sept. 11, 2024.
TORONTO – The U.S. Consumer Financial Protection Bureau has ordered TD Bank Group to pay US$28 million for repeatedly sharing inaccurate, negative information about its customers to consumer reporting companies.
The agency says TD has to pay US$7.76 million in total to tens of thousands of victims of its illegal actions, along with a US$20 million civil penalty.
It says TD shared information that contained systemic errors about credit card and bank deposit accounts to consumer reporting companies, which can include credit reports as well as screening reports for tenants and employees and other background checks.
CFPB director Rohit Chopra says in a statement that TD threatened the consumer reports of customers with fraudulent information then “barely lifted a finger to fix it,” and that regulators will need to “focus major attention” on TD Bank to change its course.
TD says in a statement it self-identified these issues and proactively worked to improve its practices, and that it is committed to delivering on its responsibilities to its customers.
The bank also faces scrutiny in the U.S. over its anti-money laundering program where it expects to pay more than US$3 billion in monetary penalties to resolve.
This report by The Canadian Press was first published Sept. 11, 2024.
