B.C. urges Bank of Canada to avoid ‘devastating’ interest rate hike in September
Posted August 31, 2023 10:01 am.
Last Updated August 31, 2023 7:35 pm.
B.C.’s premier has sent a letter to the Governor of the Bank of Canada urging him to reconsider a possible interest rate hike in September, as he says “people in B.C. are hurting.”
“In your role as Governor, I urge you to consider the full human impact of rate increases and not further increase rates at this time,” Premier David Eby wrote Thursday to Governor Tiff Macklem.
Eby begins the letter by acknowledging the BoC’s role in helping to lower inflation and reduce some cost pressures on people and businesses. However, Eby understands the BoC is “seriously considering yet another interest rate hike this September.”
“This serious consideration comes despite cautions against such an approach from all quarters in Canada, including cautions from senior economists at banks like CIBC, made before the last rate hike,” he wrote.
“While the role of the Bank of Canada is to make decisions about monetary policy, my role as Premier is to stand up for people in B.C. and ensure their voices are heard as decisions are made that impact them.”
The last rate hike on July 12 brought the BoC’s key interest rate up by a quarter of a percentage point, to five per cent — the highest it’s been in more than two decades.
The Bank of Canada said at that time, the rate hike was prompted by elevated demand in the economy driven by strong consumer spending, as well as signs that prices continue to rise rapidly.
“These decisions are difficult, and we did discuss the possibility of holding rates unchanged and gathering more information to confirm the need to raise the policy rate,” Macklem said in July.
However, Eby says the impacts of rate hikes are at “their earliest stages; many challenges are yet to come.”
The premier adds it is “no surprise” to him that the International Monetary Fund believes Canada now runs the highest risk of mortgage defaults and foreclosures among “advanced economies.”
“The danger of further unnecessary rate increases is not just to homeowners with mortgages as they renew or lock in at higher rates. Renters, young people, seniors, families, and small business owners burdened with car loan payments of lines of credit who were just starting to find their feet after COVID are being pushed to the brink.”
Eby says a further increase will have “devastating” results for tenants, as residential and commercial landlords are pressured to offset costs.
Last month, Statistics Canada shared that the largest contributor to inflation is mortgage rates, Eby notes, adding a further hike will likely lead to higher mortgage rates again, directly causing further inflation. He adds that the impacts of rate increases on homebuilder lines of credit to build new housing means projects are being put on pause.
“We need to build more housing to bring costs down,” his letter, which was also sent to Prime Minister Justin Trudeau, reads.
“This quiet but devastating impact of rate increases will result in even higher housing costs, feeding further inflation.”
Eby is urging the BoC to recognize the impacts and acknowledge the alternatives.
“We will communicate with the federal government regarding coordinated measures they and we can undertake together that will help achieve cost stability through a targeted approach and will have long term deflationary benefits.”
Economist expects BoC to hold, even before Eby’s letter
However, one economist is questioning the timing of Eby’s letter, suggesting that at this point in the rate cycle, the market is anticipating that the BoC is near the end of the hike cycle.
“It is a question of, is it some theatre?” Bryan Yu, chief economist at Central 1 Credit Union, told CityNews.
Yu says Eby’s letter to the central bank is “unique,” adding that he hasn’t seen something like this very often, or at all, in the past.
Whether it will make a difference or not to the BoC’s decision to hike rates, Yu says there are already a lot of voices out there calling for a hold.
“Our view is that they will hold in September,” he said. Yu notes that inflation was highlighted in Eby’s letter, but he notes that while they popped up a little higher in July, the overall trend of inflation is “moderating.”
“We’re seeing the economy slowing, we’re seeing some of those pressures on households starting to arise as well. I think that those are factors that will make the Bank of Canada take a little bit more of a pause this time around,” Yu said.
Eby’s letter tabled options and solutions to address inflation with longer-term policies. However, regardless if they were adopted immediately, Yu explains, “We’re not going to see a quick reduction in rates going forward, regardless, at this point.”
However, he does agree that it’s “very much necessary” for the province and Canada to build more housing.
“There is absolutely no doubt that we have an insufficient supply of housing when we are seeing immigration levels and population growth coming in as quickly and as robust as they have over the past year,” he said.
Yu warns that consumers shouldn’t expect rates to fall in the same way and frequency that they rose. He notes that by 2025, he forecasts that rates will be back to around 2 to 2.5 per cent.
Eby stands by decision to send BoC letter
At a news conference Thursday afternoon, Eby was asked why he chose to send the letter to the Bank of Canada despite it being a non-political body.
“I have an important job as the premier of British Columbia, and that’s to speak out on issues that affect British Columbians. I’m hearing from British Columbians every day that are being crushed by the cost of daily life, and one of those big impacts that they’re seeing is ever-escalating interest rates. People who have a car loan, people have a line of credit, people who have a mortgage, they’re having a variable rate mortgage or having to renew their mortgage,” he told reporters.
Eby noted that customers and renters are seeing increased costs from businesses and landlords passed down to them, and wanted a paper trail of his concerns outlined to the central bank.
“I think it is critically important to go on the record as the premier of British Columbia, to point out to the Bank of Canada, that Statistics Canada is saying that the biggest driver of inflation in our country right now is rising mortgage rates, rising mortgage costs, and to point out the reality that we see on the ground in British Columbia that the biggest increase in costs many families face … is housing,” the premier said.
“I think if the governor of the Bank of Canada wakes up this morning, and one of the first things he’s thinking about is how will that rate increase impact British Columbians, I think my job is done.”
–With files from Liza Yuzda