After a six-month pause, Canada’s central bank announced Wednesday morning it’s hiking its target overnight lending rate by a quarter of a percentage point to 1.5%.
“Canada’s economy continues to operate close to its capacity and the composition of growth is shifting,” the Bank of Canada said in a press release, projecting an average growth rate of 2% over 2018-20.
Housing markets are stabilizing after adjusting to stricter mortgage qualification rules that took effect Jan. 1, but the tighter guidelines coupled with higher interest rates are depressing household spending. Although exports are strong and business investment is booming under “solid demand growth and capacity pressures,” the bank cited mounting trade tensions between Canada and the U.S. and possible protectionist measures as “the most important threat to global prospects.”
The bank predicts recent tariffs on steel and aluminum imposed by the U.S. will have a “modest” effect on Canadian growth and inflation, though it acknowledged “difficult adjustments” ahead for certain industries and workers.
The bank’s growth outlook largely remained in line with its April forecast, with the economy running close to capacity and inflation near the bank’s 2% target. However, underlying wage growth is running at 2.3%, “slower than would be expected in a labour market with no slack.”
For consumers, Wednesday’s decision is a small step toward the unfortunate inevitability of higher borrowing costs after years of super-low interest rates. The Bank of Canada’s overnight lending rate directly influences the prime rate banks use to determine interest rates for variable rate mortgages, lines of credit, and other loans. With nearly half of all outstanding mortgages in Canada up for renewal in 2018 and stricter mortgage qualification rules, rising interest rates mean borrowing is not only more expensive, but harder to secure in the first place.
In its statement, the bank said it continues to monitor high household debt level and the economy’s sensitivity to higher interest rates. Canadians may be girding their finances in anticipation of rate increases, but a “staggering” number are still living on the brink, according to the latest quarterly MNP Debt Consumer Index. The online survey of 2,001 Canadians conducted between June 15-19 found 27% of respondents feel their debt situation is better compared to a year ago, with the number of people who believe an interest rate hike will move them towards bankruptcy edging down slightly to 28% from last quarter. Still, 42% of those surveyed said they’re $200 away from financial insolvency at month’s end, with 27% reporting “absolutely no wiggle room at the end of the month,” according to MNP.
The Bank of Canada has three remaining interest rate decisions scheduled for 2018, with the next one scheduled for Sept. 5.
“Based on the content of the release, Canadians should expect rates to continue to rise in the latter part of 2018 and into 2019,” James Laird, president of CanWise Financial, said. “The Bank of Canada’s policy for the next 12 months will likely be similar to the previous 12 months, unless there are changes in trade actions towards Canada by the U.S.”
Source: Bank of Canada