Montreal Gazette – October 19, 2005. 

Home ownership is more expensive this morning for buyers and owners with floating-rate mortgages after the Bank of Canada raised its trendsetting rate a quarter point yesterday to 3.0 per cent.

Chartered banks followed the increase, boosting their prime rates - those charged their best customers - a quarter point to 4.75 per cent.

And more rate increases are expected, likely starting at the next rate setting Dec. 5.

Bank of Montreal economist Sal Guatieri predicted the Bank of Canada will raise its key rate six more times over this year and next to 4.5 per cent.

For a family carrying a standard $150,000 variable-rate mortgage, such an increase would boost their annual payments by $1,767 per year to $10,986, estimated Karl Madsen, a Vancouver sales manager with national independent mortgage broker Invis Inc.

For a family with a $300,000 mortgage - common in Vancouver and Toronto - the increase would be double that, he said. "That would hurt but not bankrupt your average Canadian."

Whether families should lock in their mortgages depends in part on whether they want the peace of mind that comes with having a fixed rate, he added.

"If you couldn't afford to have your payments go up by $150 a month, then taking a fixed rate ... at 4.5 per cent would be a good move," Madsen said.

While some analysts don't expect interest rates to rise that high, they agree there will be several more hikes during the coming year.

"The bank clearly states that further increases to the overnight rate are coming in order to ensure that inflation remains well behaved," said Jack Homareau, an economist with the Royal Bank, which expects another four hikes by the middle of next year.

The Bank of Canada, in announcing it was raising its overnight target lending rate for the second time this year, said that because the "economy now appears to be operating at capacity, some further reduction of monetary stimulus will be required ... to keep inflation on target."

The bank said inflation will rise to three per cent, a full point above its two-per-cent target.

However, with soaring energy prices and global trade and currency imbalances, the bank said there are risks that the global economy - and, in turn, Canada's - will be weaker than expected, which it suggested would limit future rate hikes.

The increase in bank rates, combined with falling oil prices, torpedoed stocks on the Toronto exchange. The loonie was up 0.05 of a cent to 84.86 cents U.S.

Meanwhile, Statistics Canada's barometer of the short-term direction of the economy continued to point to steady growth in the months to come, adding to expectations that interest rates will continue to rise.

For media comments and inquiries, please contact:

Steven Moyes
604-879-0228
E:  Steven Moyes

« Back