Edmonton Journal – October 19, 2005. 

Additional increases planned in order to contain rise of inflation

OTTAWA - Homeownership is more expensive today for buyers and for owners with floating-rate mortgages, and will become even more costly in the months to come, as the Bank of Canada raised its trendsetting rate another quarter-point Tuesday.

How much more expensive depends on how high interest rates go, but with some analysts predicting they will rise another 1.5 points, homeowners who face rising rates could be paying thousands of dollars more a year.

Bank of Montreal economist Sal Guatieri sees the Bank of Canada raising its trendsetting interest rate a further six times over this year and next to 4.5 per cent from what was 2.75 per cent prior to this week's quarter-point hike.

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.

And for a family carrying a $300,000 mortgage, which is not unusual in a major city like Vancouver or Toronto, the increase would be double that, he noted.

"That would hurt but not bankrupt your average Canadian," Madsen said.

Whether families should lock in their mortgages, however, depends, in part, on whether they want the peace of mind that comes with having a fixed rate, he said. "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 other analysts don't expect interest rates will rise that high, they agree there will at least be several more rate hikes over 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 RBC, which expects another four rate 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 to three per cent from 2.75, said that because the "economy now appears to be operating at capacity, some further reduction of monetary stimulus will be required to ... to keep inflation on target."

The bank reiterated 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, it added there are also risks that the global economy, and in turn Canada's, will be weaker than expected, which it suggested would limit future rate hikes. Meanwhile, consumers and businesses today are also paying more for cars, and other big ticket items that are often financed, such as furniture and appliances.

Lending institutions followed the lead of the Bank of Canada by raising their prime rates by a quarter-point to 4.75 per cent. The prime is the benchmark rate for consumer and business loans, as well as variable rate mortgages.

The increase in rates, plus falling oil prices, torpedoed stocks on Bay Street, while boosting the loonie back towards the 85 cents US level.

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