It’s no secret that interest rates have been on the rise in Canada. In 2017, for the first time in seven years, the Bank of Canada (BOC) increased interest rates by 0.5 per cent, going to 1 per cent. On January 17, 2018 the BOC increased its key rate by another 0.25 per cent. Experts predict that more interest rate increases will be coming in 2018, but the question is when will interest rates rise again, in Canada?
To answer that question, we’ll look at the evidence.
The initial BOC interest rate increases came in July and September of 2017. Following that, there have been three more announcements: October of 2017, December of 2017, and the most recent one on January 17, 2018, which resulted in another increase of 0.25 per cent.
In October, the BOC was concerned about how newly announced Canadian mortgage rules would affect the housing market.
On December 14, 2017, BOC governor Stephen Poloz gave a speech where he identified three “slower moving, nagging issues” that plague him: high house prices and household debt, cyber threats, and the difficult job market for young people. Up until a couple of weeks ago, many forecasters still had doubts that the BOC would raise its rates in January. However, two strong reports — the December jobs data and the bank’s business outlook survey — led many experts to change their predictions.
On January 17, 2018, the BOC pointed to unexpectedly solid economic numbers as key drivers behind its decision to hike the trend-setting rate to 1.25 per cent, up from one per cent. While the central bank signalled more rate increases are likely over time, it highlighted the growing, negative impacts related to the unknown outcome of the renegotiation of the North American Free Trade Agreement. The BOC warned that lower corporate taxes in the U.S. could encourage firms to redirect some of their business investments south of the border. On the other hand, it predicted Canada to see a small benefit from the recent U.S. tax changes, thanks to increased demand. The BOC said that inflation was close to target and the economy was operating roughly at capacity. It also said consumption and residential investment had been stronger than anticipated, reflecting healthy employment growth.
Moving forward, the BOC predicted household spending and investment to gradually contribute less to economic growth, given the higher interest rates and stricter mortgage rules. It predicted Canada’s high levels of household debt would amplify the effects of higher interest rates on consumption.
Exports have been weaker than anticipated but are still expected to contribute a larger share of Canada’s growth, the bank said. It also noted that government infrastructure spending has helped lift economic activity.
The BOC also released new economic projections where it slightly increased its predictions for 2018, up to 2.2 per cent from 2.1 per cent. It expects the economy to expand by 1.6 per cent in 2019, up from its previous call of 1.5 per cent. The fourth quarter of 2017 and the first quarter of 2018 are each expected to see annualized growth of 2.5 per cent.
Many experts agree that more interest rate hikes will occur in 2018 — possibly more than one. The next BOC announcement is scheduled for Wednesday, March 7.
What is the impact of higher rates on consumers?
According to The Globe and Mail, Canadian’s household borrowing continues to climb.
“Statistics Canada reported that the ratio of household credit-market debt to disposable income – the key gauge for measuring Canadians’ debt loads – rose to 171.1 per cent in the three months ended Sept. 30, up from a revised 170.1 per cent in the second quarter (originally reported as 167.8 per cent),” The Globe and Mail stated in a December 14 article.
While Canadians don’t borrow directly from the Bank of Canada, its federal interest rate largely determines the ‘prime’ interest rate upon which banks and other lenders base their own rates. Because of the increases to the BOC rate, the prime rate has increased from 2.7% in April 2017 to 3.45% in January 2018.
The impact may be significant as Canadians are carrying more debt than ever, and an increase in interest rates affects Canadian’s ability to finance new purchases and makes it more difficult to pay existing debts (including credit cards, lines of credit, mortgages, loans, etc.)
Is it time to borrow at fixed rates or lock in variable rates?
Fixed rates are a common option for long-term loans, such as mortgages and student loans, that won’t be affected by further rate increases during the term of the loan.
No matter when interest rates increase again, the financial professionals at Fuller Landau Debt Solutions can help you cope. Call us today to schedule a free consultation at (416) 927-7200.