As highly speculated, the Bank of Canada announced this morning it is raising its key overnight lending rate by 25 basis points. Now, the benchmark rate sits at 1.25 per cent – the highest rate the country has seen since the 2009 financial crisis. This is the third overnight rate hike in less than a year.
The Bank pointed to Canada’s impressive economic growth as one of the reasons for the rate hike, in addition to other economic data performing better than expected. This includes a strong pace of business investments, increase in residential consumption and strong employment growth.
In a statement released after the announcement, the Bank said, “The global economy continues to strengthen, with growth expected to average 3 1/2 per cent over the projection horizon. Growth in advanced economies is projected to be stronger than in the Bank’s October Monetary Policy Report (MPR). In particular, there are signs of increasing momentum in the US economy, which will be boosted further by recent tax changes.”
The Bank also noted in its statement that “Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity.” The Bank’s key agenda is to keep inflation as close to two per cent as possible.
How the U.S. economy factors into rate changes
One of the Bank’s biggest concerns remains the threat of the North American Free Trade Agreement (NAFTA) being abandoned up by the Trump administration. The future of NAFTA weighs increasingly on the outlook of Canada’s economy. The Bank said it is factoring in the negative affects a major shift like the end of NAFTA would have on the Canadian economy.
In its January Monetary report, the Bank said it expects the U.S. economy to grow at a solid pace. This is good news for Canada, as the U.S. is our largest trading partner. But on the other hand, business-friendly tax cuts in the U.S. could encourage businesses in Canada to move south of the border.
Other factors supporting higher rates include higher commodity prices, like the price of crude oil that is now more than $63 USD per barrel.
Impact on Canadians and big banks
Days ahead of the announcement, the “Big Six” Canadian banks raised their fixed mortgage rates, likely in anticipation of the BoC rate hike. Canadian Imperial Bank of Commerce, Royal Bank of Canada and Toronto-Dominion Bank implemented increases last week while Bank of Nova Scotia, Bank of Montreal and National Bank of Canada followed suit earlier this week, raising their closed five-year fixed-rate mortgage rates to 5.14 per cent from 4.99 per cent, among other changes.
The interest rate hike also most likely means commercial banks will raise their prime rate, which is currently at 3.2 per cent. This could be bad news for anyone with a variable-rate mortgage, line of credit or loan as they will see an increase in their interest payments.
And it seems like many Canadians are already concerned. The most recent quarterly MNP consumer debt survey found a third of Canadians can’t pay their monthly bills, including debt repayments, citing rising interest rates as an obstacle. Over 40 per cent of respondents said they fear financial trouble if interest rates rise much further and one-in-three agreed they’re concerned rising rates could move them toward bankruptcy.
But for savers, higher interest rates also mean a better return on fixed-income products, like GICs.
The next scheduled overnight rate announcement is March 7, 2018. The next full update of the Bank’s outlook on the economy and inflation, including risks to the projection, will be published in the MPR on April 18, 2018.
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