Household spending expected to drop dramatically

Household spending expected to drop dramatically

Canada's central bank increased its key interest rate to 3.75 per cent this morning. In hopes of fighting inflation, The BoC has raised its policy rate six times since the month of March.

The central bank said in its newest Monetary Policy Report that it foresees household borrowing costs climbing quickly. Households facing renewals are looking at larger increases than what we've seen the past 30 years.

"For example, a homeowner who signed a five-year fixed-rate mortgage in October 2017 would now be faced with a mortgage rate that is 1.5 to two percentage points higher at renewal," the Bank of Canada said.

New construction builds along with ownership transfer costs and renovations are expected to be the most impacted by the bank's interest rate hike cycle.

Residential investment is expected to continue to soften into the first half of 2023, but not to the same extent as what we have seen throughout this year. Home prices have dropped by nearly 10 per cent since March, and are expected to drop even further, most notably in markets that experienced substantial increases over the pandemic.

Shelter costs and food prices account for about 40 per cent of Canada's inflation rate, and will usually run up even higher for relative spending in lower-income Canadians. Shelter inflation neared seven per cent this year, and has remained inflated while mortgage costs and rent prices shoot upward.

The BoC also mentioned how spending on automobiles, appliances and furniture have already displayed signs of a considerable decline. Demand for the travel and hospitality industries will undoubtedly be impacted as well.

The bank suggested that household spending should rally and rebound by the middle of next year. New home purchases should see a boost due to healthy immigration, and monetary policy likely to ease late next year.