Bank of Canada Raises Overnight Rate to 1.75%; Cites New Trade Policy and Growing Economy

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Bank of Canada Governor Stephen Poloz at a press conference following an interest rate announcement in April. 

After months of speculation, indeed, the Bank of Canada decided to raise its benchmark interest rate by 25 basis points this morning. This quarter-point hike brings the target for the overnight rate to 1.75 per cent.

This is the third time the central bank has raised rates this year, and the fifth time since July 2017. This rate hike most likely means commercial banks will soon hike their prime rates, making borrowing costs more expensive for anyone with a floating rate loan, like a variable-rate mortgage or a line of credit.

New trade policy boosts confidence in economy, but Bank still has concerns

In a statement released shortly after the announcement, the Bank lists several reasons for raising rates this time, including the finalization of the new trade agreement to replace NAFTA.  The Bank states, “The global economic outlook remains solid. The US economy is especially robust and is expected to moderate over the projection horizon… The new US-Mexico-Canada Agreement (USMCA) will reduce trade policy uncertainty in North America, which has been an important curb on business confidence and investment.”

The Bank did, however, raise some concerns over trade relations between the U.S. and other nations, most particularly China. The tariffs implemented a few months ago by the Trump administration on its trading partners has caused a number of conflicts, placing pressure on emerging markets and weighing on global growth and commodity prices. But the Bank assures that amidst volatility in the financial market, conditions remain accommodative of a rate hike.

Along with the interest rate announcement, the Bank also released its Monetary Policy Report (MPR). In the MPR, the Bank says, “The Canadian economy continues to operate near its capacity, and growth is relatively broad-based across sectors and regions. Meanwhile, inflation is close to our target. What stands out is that, even with today’s increase in the policy rate to 1.75 per cent, monetary policy remains stimulative. In fact, the policy rate today is still negative in real terms; that is, once you adjust for inflation.”

The MPR also pointed out that the labour market is standing strong, with unemployment at its lowest point in 40 years. Wage growth, the Bank notes, is running at around 2.3 per cent.

Rates will surely continue to rise into 2019

Going forward, the Bank of Canada is hinting there are still more rate hikes to come, since the policy interest rate will need to rise to a neutral stance to achieve the inflation target. The Bank has a mandate to keep inflation between one to three per cent. That being said, latest data shows Canada’s inflation rates sitting at 2.2 per cent.

According to BMO economist Benjamin Reitzes, the three most interesting points in the Bank’s statement were: the potential impact of U.S.-China trade tensions; what the yield curve is telling us about the economic outlook; and the impact of policy changes on mortgage lending.

In a note sent to journalists, Reitzes says there is “clearly an appetite for a few more hikes from the Bank. BMO’s forecast for hikes in January, April and July is looking pretty good right now.”

Despite the rate hike, interest rates still remain historically low. That continues to fuel household spending, and the Bank expects that to continue to grow at a healthy pace.

Higher rates may impact Canadians now more than ever

Higher rates could spell trouble for Canadians struggling to pay their bills. A new survey conducted by Ipsos found that one in three Canadians are worried that rising interest rates could push them towards bankruptcy. That is up six per cent since June.

Half of those surveyed are concerned about how they will manage debt obligations as the cost of borrowing continues to rise.

And if forecasters are right, and the Bank raises rates three more times in 2019, Canadians will be faced with an even higher cost of borrowing.

The next Bank of Canada interest rate announcement is scheduled on Dec. 5.

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Economic News / Loans / Mortgage News / Mortgages / Personal Finance / Personal Finance News / RSM News

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