On October 24th, the Bank of Canada raised its overnight benchmark rate by another quarter point to 1.75 per cent, the fifth such increase since the summer of 2017, which is having an immediate impact on any type of consumer debt pegged to this key rate such as home equity lines of credit and variable rate mortgages. What’s more troubling, for those feeling this pinch the hardest, is a change in language and tone from our central bank that indicates more rate hikes are likely on the near horizon.
Rising rates and economic instability have many Canadians worried about major expenses, such as their mortgage payments, and even the possibility that their debt becomes overwhelming to the point where they must consider bankruptcy. At Hatch Online Mortgages, we’re very sympathetic to the plight of hard-working Canadians trying their best to navigate these turbulent economic waters. This post explores the main elements driving the rate increases, as well as some factors that may slow the pace of these increases down… there is hope.
Why Does the Bank of Canada Keep Raising Interest Rates?
The Bank of Canada plays an important role by keeping inflation in check with monetary policy, through its direct ability to control the interest rates that banks and other major lenders must adhere to. After a long period of rock bottom interest rates, intended to stimulate economic growth after the U.S. housing meltdown of 2008 triggered a global recession, and the oil price crisis of 2014 left the resource-dependent Canadian economy in dire straits, our central bank has been on a mission to ‘gradually’ raise interest rates since the summer of 2017. This is all to keep inflation in check as the interlinked economies of Canada and the U.S. have shown significant growth over the past couple of years, driven by factors such as low unemployment, trade and investment.
The Canadian economy is also expected to get a significant boost, in the billions, from the sale of cannabis, which was legalized in October with greater than expected demand resulting in supply shortages:
Canada’s measure of real gross domestic product will get a boost after the legalization of marijuana adds as much as $8 billion to the country’s economy, according to Toronto-Dominion Bank. – Financial Post
BoC Policy Statement Gives Hints of More Interest Rate Hikes to Come
These interest rate increases haven’t been much fun for consumers and mortgage applicants who’ve gotten used to very low financing rates for a long period of time. A new red flag was slipped into the language of the policy statement the Bank of Canada made coinciding with the latest rate increase last month:
The BoC raised its policy rate by another 0.25% [on October 24th, 2018] and also removed the word “gradual” from its key policy statement. The Bank now anticipates that it will need to raise its overnight rate to at least 2.5% (up from 1.75% today) to keep inflation stable, and it will do this at whatever pace the data say is necessary. – Movesmartly.com
A more aggressive timetable may be in the works for further interest rate increases by the Bank of Canada in the very near term, according to prominent Canadian economists weighing in on how the markets will interpret the removal of the word “gradual” from the central’s banks policy statement:
Financial markets will interpret the omission as a signal that the BoC is leaving the door open for consecutive rate increases, with one possibly happening as early as December, Avery Shenfeld, chief economist at CIBC Capital Markets said in a note to clients shortly after the announcements. – Global News
Appetite for Rate Hikes in The United States
The US Fed has also shown a strong appetite for rate hikes, citing its own inflationary concerns, with which Canada often moves in lock step. With the USMCA seemingly all but concluded, economic uncertainty was also reduced in October between Canada and our largest trading partner, the U.S., seeming to pave the way for more interest rate hikes on both sides of the border as we head into 2019.
Successive Rate Hikes Having a Serious Impact on Canadian Consumers
This increased pressure on the cost of financing has many Canadians concerned about their ability to keep up. In a survey of over 2,000 Canadians, conducted in September, there was a noticeable uptick in those who are concerned about rising interest rates significantly affecting household budgets, even to the point where some folks may have to consider insolvency:
One in three respondents to a new Ipsos survey conducted on behalf of insolvency trustees MNP said they are concerned that higher interest rates could force them toward bankruptcy. That was up about six per cent over a similar survey in June. Higher interest rates are already pinching the budgets of about 45 per cent of respondents and 52 per cent say they are concerned about meeting their debt payments. – CTV News
We Canadians are a hardy lot. Nearly 80 per cent of respondents in the same survey say they plan to counter rising interest rates by cutting back on their spending habits. Nearly 40 per cent believe their overall debt will be reduced over the coming year. However, this type of consumer belt tightening, especially as we head into the crucial holiday season, will certainly take some wind out of the economic pressures fueling the inflationary concerns expressed by the Bank of Canada in its October policy statement.
Economic Exuberance Not Expected to Last
There are a couple of other major factors that may put the brakes on inflationary pressures and possibly give our central bank pause when considering its next rate hike. The price of oil took a drastic plunge through the month of October, and while many Canadians may be pleasantly surprised by the resulting lower prices at the gas pumps, lower oil prices typically put a huge drag in our resource-dependent Canadian economy, which was a big reason our central bank kept interest rates so low for so long.
Much of the exuberance in the U.S. economy may be short-lived as well, as it has been financed by deficit spending, on infrastructure and tax cuts, which has ballooned to highs not usually seen during peace time or outside of a recession. President Trump’s aggressive stance toward major U.S. trading partners, such as Canada, Europe and China are also starting to take a huge toll on major sectors of the U.S. economy. Counter tariffs are causing price increases, supply shortages and barriers to exports; for example, many U.S. crops, particularly soy beans, are rotting in the fields because farmers can no longer export them to China.
The net overall effect, as projected by the Bank of Canada for GDP growth in the U.S. is a slowdown from 2.9% in 2018 to 2.4% in 2019 and 1.6% in 2020. Canadian GDP growth projections follow a similar slower pace of 2.1% in 2018 and 2019 with a 1.9% GDP growth rate for 2020.
Let Hatch Get You a Great Mortgage Rate and Terms Suited to Your Needs
As ordinary Canadians, we have very little say in the big economic factors that we all have to deal with; however, when it comes to your own mortgage options, Hatch gives you lots of say. We work hard to bring you some of the best mortgage rates in Canada, plus over 30 years’ experience to help you choose the right terms for your application. Simply, apply for your mortgage, online with Hatch, and we’ll get cracking right away to secure a great mortgage for your dream nest!