With the next Bank of Canada (BoC) rate announcement exactly one week away, mortgage borrowers are likely wondering just what’s in store for interest rates. While they can be assured that rates are indeed going higher, by just how much remains to be seen. 

While a recently cooler July inflation read has stoked expectations that the metric has peaked, the BoC -- and its American counterpart the U.S. Federal Reserve -- have made it clear they're thoroughly ensconced in aggressive mandates to hike rates to reign in CPI. 

READ: 750,000 Canadian Mortgages at Risk of Rising Trigger Rate Payments This Fall

Recent comments from Fed Chair Jerome Powell that rates would stay higher for longer, have also fuelled predictions the BoC will take a more hawkish approach next Wednesday. As a result, analyst calls are ranging anywhere from a jumbo one-and-done, to a more moderate half-point hike.

Doug Porter, Chief Economist at BMO Capital Markets, tells STOREYS that given the steep inflation fight facing both countries, he’s not surprised Mr. Powell enforced expectations that rates would remain elevated.

“Frankly, that was fairly clear even before the speech, that inflation is just so high that this is not like cycles we’ve dealt with in recent years where policymakers at central banks could back down pretty quickly at the first sign of trouble, because inflation really wasn’t that much of a problem,” he says. “They had the luxury of being able to back down -- and unfortunately, we don’t have that luxury this time because inflation is so high to begin with, you really have to stick to it. Even if the economy gets into some stormy weather here, they really have to stick to the tiller and keep on pressing ahead.”

He adds that BMO has tweaked their call from a previously forecasted 0.5% earlier in August, to a three-quarter point next week, given recent resilience in the markets, and what he says are baked in expectations of a 75-basis-point increase.

“Part of that is that the economy has hung in there relatively well,” he says. “If anything, financial markets -- I appreciate they’ve backed off in the last week or so -- but through the course of the summer they actually had a pretty good rally. And, in fact, a lot of the recession chatter we were hearing a few weeks back [has] died down somewhat and we take the Bank of Canada at their word that they’re trying to frontload these interest rate increases, in other words, do them as quickly as possible to get to where they want to go as quickly as possible.

The market has closed the pricing in at a 75-basis-point hike and I don’t think the Bank wants to, quote, 'disappoint the market'. I don’t think they want to be seen doing less than what the market expects, because that would send the wrong sign that they’re backing off a bit, and I don’t think that’s the signal they want to send.”

In an emailed statement to STOREYS, Avery Shenfeld, Chief Economist at CIBC World Markets, says the bank is also anticipating a 75-basis point increase, which could leave room for a pause the following month. "We expect that the Bank of Canada will carry on with a further 75 basis point rate hike in the face of data that has shown some signs of an economic slowing, but too much momentum in core inflation to pause or choose a smaller rate hike," he writes.

"A move of that scale will leave overnight rates at level that could provide enough braking power on the economy to bring inflation down next year, but it will be several quarters before we have that evidence in hand. If we see what we expect will be further proof that growth is decelerating, the Bank would be able to pause on interest rates in October, and allow subsequent data to show whether or not still higher rates are necessary, but it will be a very long wait for those hoping that there will be room to reduce interest rates. Higher interest rates make things painful for debtors and home buyers, and will make avoiding a recession a closer call than we would like, but we’ll need to suffer through some of that if we are going to get inflation back down to earth."  

James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender, concurs that the central bank will make a larger move, in efforts to exceed neutral, and face inflation, as quickly as possible, before taking a pause for the remainder of the year.

“I expect that the Bank of Canada will increase the key overnight rate by 75 basis points next week, which will bring it to 3.25%,” he says. “This puts the rate slightly higher than the neutral range of between 2 to 3%, which is where the Bank has indicated it needs to be to fight inflation. I expect the Bank to pause after this rate hike to see the effects of all of their rate increases this year.”

While that will spell higher mortgage payments or reduced principal debt paydown for borrowers with floating rate debt, he doesn’t believe the larger move will startle the bond market, which has seen yields surge this summer on recession fears.

READ: Is Now the Time to Switch to a Fixed Mortgage Rate?

“Assuming the rate hike is no greater than 75 basis points, consumers should expect fixed rates to remain unchanged,” he says. According to his calculations, this will translate into a $236 monthly increase -- or $2,832 -- for a borrower with the Canadian average-priced home of $630,000, and a five-year variable rate of 3.5%.

Leah Zlatkin, LowestRates.ca expert and licensed mortgage broker, sits in the camp of a smaller increase, given July’s lower-than-expected inflation print of 7.6%.

“Based on the August report, it’s clear that inflation has slowed a bit and we may not see as drastic an increase as we saw during the last announcement,” she says. “Because of this, I think the Bank of Canada will pull the lever less drastically for next week’s rate increase than in July. It is unlikely we will see a full point, even closer to a 0.5% versus 0.75% raise.” 

Should that be the case, that’ll spell a $165 monthly increase for a borrower, according to her calculations.

Relief is on the Horizon

Consumers can feel some assurance that the rate pain is nearly through -- while their takes on the size of the hike differ, experts agree that the central bank seems to be closing out its hiking cycle.

“I think we’re getting closer to the end, after the move in September,” says Porter, adding that it can take a full two years for the Bank’s rate policy to completely work its way through and impact inflation. 

“I think the economy is going to really start to show strains of higher rates as we go through the next six months or so, and we’ve already seen housing essentially hit the brakes. I think the interest rate increases will start to filter into other areas as well.”

States Laird,  “In the Bank’s commentary, if they signal that the rate hikes are coming to an end, then this will provide stability to mortgage rates and clarity for those shopping for a home.”