Canadian Imperial Bank of Commerce Capital Markets recently disclosed that the country’s increased sensitivity to higher interest rates will hinder the central bank from hiking borrowing costs beyond current levels.
According to a report by Bloomberg, economist Royce Mendes emphasised that the Bank of Canada could be taking the effect of its rate hikes too lightly. This is considering central bank’s claim that it may be only halfway through its rate-hike cycle after raising borrowing costs five times already.
While the full impact of these rate hikes is yet to be felt, there is already an indicator from car sales that the effects of the rate hikes are showing sooner compared to the past. Mendes warned that this could be an issue for an economy that is increasingly dependent on interest rate-sensitive industries.
“The fact that the effects are showing up sooner this time around could simply be a sign that the storm will pass quicker. But more likely it’s a reflection that models based on historical evidence will tend to underestimate the effects of rate hikes on the Canadian household sector in its current indebted state,” Mendes said.
In hindsight, Mendes said that the central bank would not be able to go beyond two more rate increases. This will leave the bank’s hiking cycle at 2.25%, which is well below the 3% midpoint of its estimated range for a neutral rate.
