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After climbing higher for a record 14 straight days, the TSX, Canada’s biggest stock market index, hit a brick wall after the Bank of Canada said it was ending its quantitative easing and could raise its key lending rate sooner than expected.

On Wednesday, October 27 the Bank of Canada surprised the markets when it announced it was ending the generous bond-buying program it initiated in the early stages of the pandemic. The central bank said that “robust economic growth has resumed” with “higher energy prices and pandemic related supply bottlenecks stronger and more persistent than expected.”

The Bank of Canada said it expects the annual inflation rate to rise throughout the rest of the year, averaging 4.75% and be 3.4% in 2022. That’s up from previous forecast of 2.4% before hitting its two percent target by 2023.

Financial markets were expecting the Bank of Canada, to cut its asset purchase in half to $1.0 billion a week, rather than abruptly ending it altogether.

The surprises kept coming with the Bank of Canada signaling it could also hike its benchmark interest rate from 0.25% as soon as April 2022. That’s three months sooner than previous projections.

Bay Street economists now believe that Bank of Canada will raise rates three times in 2022, taking the key lending rate to one percent by the end of the year.

What Does Rising Interest Rates Mean for Stocks and Housing?

These actions will have a direct impact on the stock market and Canadian economy, especially

the housing market.

Interest rate changes can either be good or bad for the stock market. If the economy is doing poorly, the Bank of Canada lowers rates to encourage borrowing and spending, which helps juice consumer spending and cause stocks to rise. It can also lead to inflation when the economy picks up.

When the economy is overly strong, central banks raise rates to cool the pace. That’s because borrowing costs are higher and both businesses and individuals cut back on spending. This can cause revenues and earnings to slip. This hasn’t happened yet; third quarter earnings have been surprisingly robust. But a ripple effect could affect stocks over the coming quarters.

Rising rates could also have a big impact on Canada’s red hot housing market. Low interest rates have sparked a fire under housing demand, lifting many urban areas into bubble territory. A new report has ranked Vancouver as the least affordable city in North America with Toronto in third place, Hamilton in fifth place, and Ottawa in ninth.

In August, investors accounted for a whopping 25% of all home prices, the highest level in a decade. Once interest rates on variable mortgages start climbing or housing prices fall, it becomes less profitable, or even unprofitable to speculate on the housing market.

Earlier and faster interest rate hikes could trigger higher mortgage payments for home buyers and real estate investors. Those with multiple properties, finding the higher payments too onerous, could sell some of their properties, and some metropolitans could experience a dramatic slow down.

Nothing is a guarantee though. There is a lot of uncertainty out there right now, a resurgence of COVID-19 could result in a return to even greater stimulus. At the same time, if household spending picks up faster than the Bank of Canada anticipates, it could raise rates at an even faster clip.

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