Posted on July 14, 2023

Interest rates likely to remain higher for longer, says DLC’s Cooper

The Bank’s hawkish tone on Wednesday sent a clear message

The Bank of Canada now expects that inflation will not hit its 2% target until the middle of 2025 – and interest rates are likely to remain elevated for a prolonged period if it is correct, according to a top economist.

Sherry Cooper, chief economist of Dominion Lending Centres (DLC), said in the aftermath of the central bank’s latest statement that borrowers should also brace for possible further rate increases down the line.

“As always, the next steps by the Bank of Canada will be data-dependent,” she said in a newsletter release. “Interest rates will remain higher for longer if the Bank is correct that inflation will not reach its 2% target until 2025. We also cannot rule out more rate hikes in the future.”

Cooper noted that global financial markets had rallied in the wake of positive data from the US indicating that inflation there had fallen precipitously in June, dropping by a full percentage point to 3%.

That saw Canadian bond yields tick downwards despite the Bank of Canada’s hawkish approach in its statement on Wednesday – but stress in the mortgage market as a result of rising rates is clear, she added.

The Bank’s latest move brought its overnight policy rate to 5.0%, its highest level for more than 22 years. That was a “widely expected” decision, Cooper said, but one whose consequences for borrowers are being closely watched by regulators.

“The hardship caused by the continued rise in mortgage rates is already evident,” she said. “OSFI [the Office of the Superintendent of Financial Institutions, Canada’s banking watchdog] recently announced the possibility of higher capital requirements for federal insured financial institutions on mortgages with loan-to-value ratios above 65% that have unusually high amortizations.

“This proposal is now out for consultation. It seems OSFI and the federal consumer watchdog are working at cross purposes.”