Bracing for interest rate hike, Canadians are feeling the pinch

Six in 10 Canadians worried about impact of rising rates

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It’s Bank of Canada decision week and for many Canadians Wednesday can only bring bad news.

There is little doubt that the Bank will hike its key interest rate, with economists predicting either 50 or 75 basis points.

But Canadians are already feeling the pinch.

A poll by insolvency firm MNP Ltd. out today found that a record number of Canadians are worried about the impact of rising rates on their financial situation. The 59% or six in 10 Canadians who expressed concerns are the highest since the survey began tracking data in 2017.

This year the Bank has raised interest rates three percentage points, with more to come, making it one of the fastest monetary policy tightening cycles in its history.

On top of that, Canadians are having to cope with decades-high inflation.

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“For households that have already slashed their budgets and shaved off as many expenses as they can, any future interest rate hikes could put them in a position where they are forced to take on additional debt to keep up with their bills. But the cost of servicing that debt is also ballooning as rates rise, making it far more difficult to pay off,” said MNP president Grant Bazian in the press release.

Renters and lower-income households are the most vulnerable. The poll found 59 per cent of renters compared with 41 per cent of homeowners are afraid they will be in financial trouble as interest rates rise.

But homeowners also have reason to be worried. Ratehub.ca says that if the Bank raises its rate by 50 basis points Wednesday, a homeowner with a variable rate of 4.25 per cent on a $593,856 mortgage will see that rate rise to 4.75 per cent. That will cost $165 more a month or $1,980 a year on mortgage payments.

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If the Bank raises its rate by 75 basis points, the new rate of 5 per cent will cost $249 more a month or $2,988 a year.

So will it be 50 or 75?

Economists at Desjardins expect the latter, but they also question whether that is the right path.

“Monetary policy works with significant lags, so using current data to guide decisions is dangerous and almost guarantees an overshoot,” Royce Mendes, Desjardins’ head of macro strategy, wrote in a note Friday.

He points to the Reserve Bank of Australia, which surprised markets by raising rates 25 basis points instead of 50, as a prudent course. While there are differences between the two economies there are also many similarities.

Both have high household debt ratios and their mortgage markets are structured so that households feel rising interest rates quickly, Mendes said. In fact, housing represents an even bigger share of Canada’s economy, making it especially sensitive to rising rates.

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“So while we think the Bank of Canada will raise rates 75 bp next week, we’re not convinced that it should,” said Mendes.

“If the Bank does deliver a second consecutive 75-point increase, we strongly believe central bankers should be more transparent about the likelihood of a recession in 2023. But given their recent track record on that count, we can’t be sure they will ,” he said.

Canadians may get some clues though on where rates will go from here. The Bank releases its updated economic projections on Wednesday, and the outlook on inflation will be key.

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CHILI-CUCUMBER GUMMIES Six years ago while holidaying in Mexico, Toronto businessman Rahim Bhaloo saw a gap in the market. While dollar stores were common in Canada, they were a rarity in this Latin American country. So PesoRama was born, a discount chain that tailors its offerings to the Mexican market. Chili-cucumber gummies anyone? The company now has 20 stores and plans to open five stores a month starting in November. In the second of our series on Latin America, Marisa Coulton tells the PesoRama story and examines how Canada and Mexico could take their trade relationship to another level.

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  • Alberta’s new cabinet will be sworn in
  • Saskatchewan Premier Scott Moe Moe will deliver an update on Saskatchewan’s plan for growth and on the provincial government’s fall legislative plans and priorities ahead of the speech from the throne. The premier will discuss opportunities for Saskatchewan to be a leader in energy and food security and how the province can protect opportunities to grow and prosper
  • The standing committee on finance meets regarding pre-budget consultations in advance of the 2023 budget
  • The standing committee on agriculture and agri-food meet regarding Bill C-234, An Act to amend the Greenhouse Gas Pollution Pricing Act
  • Statistics Canada to release travel figures between Canada and other countries
  • Earnings: Prairie Sky Royalty, Celestica

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“Surviving, but no longer thriving.” That’s how one economist described the Canadian consumer after data showed retail sales edged up 0.7 per cent in August after declining 2.2 per cent in July. The estimate for September is a decline of 0.5 per cent.

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CIBC senior economist Andrew Grantham said the volume of retail sales is likely to end the third quarter close to where it was at the end of the second.

“So while it isn’t necessarily growing, consumer spending on goods has yet to decline noticeably under the weight of high inflationary pressures and rising interest rates,” he said in a note.

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Oil producers warn that spare capacity is tight, which means that prices could spike quickly and unexpectedly. Our content partner MoneyWise highlights three stocks investors might want to own if that happens.

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Today’s Posthaste was written by Pamela Heaven (@pamheaven), with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com, or hit reply to send us a note.

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