The Bank of Canada (BoC) has recently taken steps to address concerns over elevated inflation by raising interest rates. In both June and July, the BoC increased rates by 25 basis points. These decisions reflect the central bank's efforts to manage inflation, which has been influenced significantly by rising mortgage and shelter costs.

Mortgage and shelter costs now account for 30% of the current inflation numbers, underlining the crucial role they play in the economic landscape. While the rate hikes were intended to address inflation, some experts suggest that they may be unintentionally exacerbating the situation, impacting the average Canadian.

Inflation Figures and Insights

Despite the challenges, there is some positive news. Inflation rose by 3.4% year over year in May, representing a decrease from the 4.4% increase observed in April. This marks the smallest increase since June 2021. However, the focus on 'elevated core inflation' by the BoC might lead to further rate hikes, overshadowing these positive developments.

Statistics Canada's data reveals that the mortgage interest cost index experienced a 29.9% year-over-year increase in May, making it the largest contributor to the year-over-year Consumer Price Index (CPI) increase. When excluding mortgage interest costs, the CPI still rose by 2.5% in May. Mortgage costs, energy, and food & food services are the key drivers of core inflation, contributing nearly 60% of inflation in May.

Predicting Future Interest Rates

According to a recent survey of market experts, the Bank of Canada is unlikely to raise interest rates further throughout the remainder of the year. In fact, the survey suggests that rate cuts may be on the horizon for spring 2024. This cautious approach is rooted in the need to carefully balance economic factors and inflation pressures.

Economists emphasize that while interest rate hikes are currently off the table, potential future increases remain contingent on economic indicators and the trajectory of inflation. The central bank is committed to ensuring that inflation returns to its two per cent target while taking into account various economic influences.

A Cautionary Note

It's worth noting that the Bank of Canada's rate-hike campaign has sparked discussions among experts. Some economists argue that the central bank's aggressive approach might have unintended consequences. They stress the importance of patience, as the impacts of rate hikes on the economy and households take time to materialize fully.

While rate hikes aim to curtail demand and lower inflation, they can inadvertently affect other areas, such as mortgage interest costs and rent. The potential for higher interest rates to drive inflation in critical sectors underscores the complexity of managing economic variables.

Looking Ahead

As we move forward, the Bank of Canada's approach to interest rates and its impact on inflation will remain a central focus. We are committed to staying abreast of these developments and providing you with timely insights to guide your financial decisions.

At Valueland Mortgages, we stand by our commitment to assisting you throughout your mortgage journey. If you have any questions or would like to discuss how these economic trends may affect your mortgage plans, please don't hesitate to reach out to us.