On September 6th, 2017, the Bank of Canada raised its key overnight lending rate by another 0.25 per cent, the second rate increase this summer. This past July, the central bank raised its key rate for the first time in 7 years, to prevent the Canadian economy from overheating, as it grew by an incredible 4.5 per cent in the second quarter of this year, placing us among the fastest growing economies in the developed world. A big part of the central bank’s mandate is to help control inflation (aiming at a low and stable target rate of 2 per cent) through monetary policy (i.e. setting its key lending rate) so that long-term investments, productivity and job-creation in Canada are encouraged and protected; however, these interest rate hikes directly affect our financial system, impacting many Canadian homeowners, mortgage applicants and financial institutions.
Big Banks Follow Bank of Canada Lead: Hiking Prime Rates
A hike in the key overnight lending rate by the Bank of Canada, upon which Canada’s financial institutions depend for their own lending and borrowing purposes, almost invariably results in interest rates going up across the board. Canada’s big banks were quick to follow on the heels of the Bank of Canada September rate hike, immediately raising their own prime rates:
RBC was first off the mark, followed quickly by the others, raising their prime rates to 3.2 per cent from 2.95 per cent, where they had been since the central bank’s last rate increase in July. – CBC
Bank of Canada Rate Hikes Directly Impacting Canadian Homeowners
These successive interest rate increases by the central bank are now starting to have a direct impact on Canadian homeowners, especially those with variable rate mortgages and home equity lines of credit:
The Bank of Canada’s increase to its key interest rate [September 6th], the second bump since July, will start putting a more noticeable squeeze on consumers holding variable rate mortgages, lines of credit or any consumer debt tied to bank prime lending rates, according to experts. – Vancouver Sun
Canadian Are More Sensitive to Interest Rate Increases in 2017
The Bank of Canada will need to exercise some caution in considering future rate increases. The average household debt to income ratio for Canadians crept up to 1.67% in the second quarter of this year. Coupled with a dip in household net worth, Canadian consumers are becoming more sensitive to interest rate hikes than they were a decade ago:
“The Bank of Canada will have to be particularly gentle,” said Nick Exarhos, an analyst with CIBC Capital Markets based in Toronto… Interest rate hikes today, due to higher levels of household indebtedness, have roughly 1.5 times the impact that they had around the early 2000s, he said. – Financial Post
Canadian Economic Growth Expected to Slow
Although Canada’s economy was roaring in the first half of this year, many analysts predict a significantly slower growth rate for the second half of 2017, leading into 2018. In fact, we’re already starting to see early evidence of this slow down as the GDP growth rate for July was flat:
Canada’s gross domestic product was essentially unchanged in July, as the oil and gas, mining and manufacturing industries all shrank. – CBC
Potential for October Rate Hike Murky at Best
Due to the obvious significant economic growth in the second quarter, many industry insiders could see the July rate increase as the writing on the wall. The September increase caught more than a few experts off guard, as about half were predicting that there would be no rate increase by the central bank, but there was still some economic exuberance to perhaps justify the rate hike. Predictions for the Bank of Canada’s next rate decision, scheduled for October 25th, are far less clear at this point.
Speaking in Saint John’s N.L., on September 27th, for the first time since the September rate hike, Stephen Poloz projected that a cautious approach will be taken regarding the pending October rate decision:
In his first speech since his second rate increase, Bank of Canada Governor Stephen Poloz cautioned there is no “predetermined path for interest rates” and said the central bank will proceed “cautiously” as it assesses the performance of the economy.
“The appropriate path for interest rates in this situation is very difficult to know, because there are a number of unknowns around the inflation outlook… We will not be mechanical in our approach to monetary policy.” – Toronto Star
Poloz went on to identify some of the vital economic metrics that the central bank will take into consideration when making its next interest rate decision in October:
The governor laid out several highly uncertain factors that are likely to influence future rate decisions, including oil prices movements, an overheated housing market and a higher Canadian dollar. The loonie fell 0.27 per cent to 80.57 cents US on the governor’s dovish comments. – Financial Post
Hatch a Plan for Your Dream Nest
At Hatch Online Mortgages, we know that even a small increase in prime lending rates can have a significant impact on homeowners, especially those with variable rate mortgages or home equity lines of credits with a substantial balance. We stay abreast of the latest trends in the mortgage industry, and the Canadian and US economy, especially with respect to mortgage rates and the risks associated with various mortgage options. We can help you quickly process the right type of mortgage for you, all through our easy-to-use online mortgage application. Let’s Hatch a plan for your dream nest!