The Bank of Canada maintained its low benchmark interest rate on January 26, 2022, but will surely start the hike soon to tackle rising inflation. Royal Bank of Canada (TSX:RY)(NYSE:RY) Economics released a report focusing on Canada’s housing market in relation to interest rates. According to the bank’s new report, home prices soared 17.8% in 2021.
However, there should be a slow down if higher interest rate kicks in. RBC forecast a muted 6.2% home price growth this year. Also, the potential implementation of the anti-speculation measures could discourage end-user buyers and real estate investors.
Robert Hogue, a senior economist at RBC, predicts the Feds will increase interest rates six times, with the overnight rate rising to 1.75% by mid-2023. He expects the bidding wars to continue because of supply shortage. However, once higher rates ripple through the economy, demand could calm and reduce the imbalance, according to Hogue.
Create passive income
Canadians should pay attention not only to the interest rate hikes but also to rising inflation. The reading in December was 4.8% or more than double the central bank’s 2% threshold. Bank of Canada Governor Tiff Macklem told the Senate banking committee that interest rate would have to start going up this year.
Macklem said, “There is some uncertainty about how quickly inflation will come down because we’ve never experienced a pandemic like this before.” Because of the uncertainty, families and households should be ready to cope with elevated prices of goods and services.
Some observers say dividend investing is a pastime of Canadians. But with the threat of an extended inflationary period, earning passive income is a necessity. A recent poll showed that Canadians spent less during the 2021 holiday season. If you have spare cash, purchase established dividend stocks like RBC or Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) to create passive income.
Bedrock of stability
Canada’s banking industry is a bedrock of stability and admired around the world. Income investors and retirees have confidence investing in the Big Five banks, as their dividend track records are more than 100 years.
RBC is a hands-down choice, because it’s the largest lender and largest publicly listed company on the TSX. The market cap stands at $201.53 billion. If you invest today, the share price is $146.76 (+10.2% year to date), while the dividend yield is 3.31%.
In early January 2022, Dave McKay, RBC’s CEO, urged the central bank to take “rapid action” by increasing interest rates to bring inflation under control. McKay thinks the acceleration of inflation isn’t transitory. He added that there are signs a wage-price cycle has already pushed up costs permanently.
BNS, Canada’s third-largest bank ($110 billion in market cap), pays the highest dividend (4.3%) among the Big Five banks. You can scoop the bank stock while the price is below $100. Market analysts see a potential upside of 8.4% from its current share price of $93.10.
Management will report its Q1 fiscal 2022 results on March 1, 2022. Its president and CEO Brian Porter said the bank is well positioned for a very bright future and expects to achieve full earnings power in fiscal 2022.
Cushion against inflation
Creating passive income from blue-chip stocks is a sure way to cushion the impact of rising inflation.
