Sunny with a chance of rate hikes

It was fun while it lasted, but Bank of Canada (BoC) Governor Tiff Macklem may wrap up his “conditional pause” era sooner than we all expected.

Driving the news: Several big-name economists at Scotiabank, Capital Economics, and CitiGroup predict that the BoC will hike interest rates by a quarter-point at its June 7 meeting—breaking with a consensus view that a pause would be maintained at 4.5%.

  • Those projections track with moves in the bond market, which is pricing in a roughly one-in-three chance of a hike in June, up sharply from last month.

Why it’s happening: Last week’s inflation report was no bueno, showing price growth unexpectedly accelerating to 4.4% in April (a far cry from the BoC's 2% target). 

Why it matters: Another rate hike will make mortgages even more expensive. And in a country that’s loaded up with mortgage debt like Canada, that's creating a “ticking time bomb” in the economy, according to a recent report by Desjardins. 

  • Borrowers will face steep increases in monthly payments as their mortgages come up for renewal (up to 40% in some cases).
     
  • That will force people to spend more money servicing their debt and less buying things, potentially causing a recession.

Yes, but: If the US debt ceiling issue isn’t resolved, forget everything you just read and throw all forecasts out the window, because it’ll be a totally different economic reality.