Reasons Why a Rate Hike is on the Horizon

Reasons Why a Rate Hike is on the Horizon

There’s speculation the Bank of Canada may raise its key interest rate at its next scheduled announcement on July 12 due to comments Bank of Canada Governor Stephen Poloz recently made to the media about the conditions needed for higher rates. This would be the first increase in almost seven years, and the first rate change since 2015.

Key indicators that point to a rate hike

Poloz comments

In part, Poloz recently told German newspaper, Handelsblatt, that despite inflation remaining low, there are other factors to consider before changing the BoC’s key interest rate.  He explains there’s a substantial lag between the moment when the economy approaches full capacity and the moment when that begins to translate into inflation. He went on to say, if the central bank only watched and reacted to inflation, it would never reach its inflation target and it would always be two years behind in the reaction. This comes a week after Poloz told CNBC that, “It does look as though those cuts have done their job.” This could indicate that low interest rates may no longer be necessary.

Loonie jumps

Until Poloz’s comments to Handelsblatt, most economists and forecasters were not expecting a rate hike until early 2018. Since then, investors likely felt more confident that the central bank could raise rates earlier than expected, causing the Loonie to strengthen against the U.S. dollar.

As of July 10, the Loonie was trading at 77.4 cents U.S. And if the BoC raised rates, even by 25 basis points, the Loonie would continue to extend its gains. A strengthened dollar could also mean that travel to the U.S.  will be a little more affordable again.

Positive economic news fueling speculation

High auto sales, increased job growth, strong GDP numbers and an optimistic Business Survey all likely point to a rate hike later this week.

Canadians buying cars in record numbers

May and June auto sales broke records in Canada. Both months saw sales of more than 200,000, with June sales, in particular, being up six per cent from last year. This is in contrast to the U.S., where auto sales are currently declining. If the trend continues, annual sales in 2017 could surpass two million for the first time ever in Canada.

Autoindustry expert and Bank of Nova Scotia economist, Carlos Gomes, told the Globe and Mail last week that higher sales are due to the economy performing better than expected.  He adds, “We recently raised our forecast to 2.7-per-cent growth for real GDP this year, and that’s a significant improvement not only from around 1.5 per [cent] last year, but much better than the two per cent we were expecting when we came into the year.”

Job numbers

June was also a robust month for job growth. Statistics Canada reports 45,300 new jobs were added to the economy last month. And despite many of these new jobs being part time, the pace of employment growth is increasing expectations.

In the last year, more than 350,000 new jobs have been created in Canada. According to Bloomberg, the odds of a rate hike occurring in July jumped to 95 per cent (up from about 70 per cent the week before) after Statistics Canada released the labour force survey.

How a hike could affect Canadians

The Bank of Canada has not raised rates since 2010. But it is well aware of the large amounts of debt Canadians are currently carrying and how even a small hike could affect our ability to service that debt.

Even an increase by 25 basis points would immediately effect floating rate loans, including variable rate mortgages and any money borrowed from a line of credit. The expectation of a rate hike is putting the spotlight on Home Equity Lines of Credit, as many Canadians have seen the value of their home skyrocket, and have used that increased equity to invest in a second home or renovate their current residence. Even worse, studies show that some Canadians have turned to HELOCs for big ticket consumables, like vacations and cars. According to Statistics Canada, Canadians owe a record high $1.67 for every dollar of disposable income.

What this may mean for homeowners and potential homeowners

A rate hike could be a good or bad thing, depending on your situation. On one hand, money will be more expensive to service, but home prices will be lower as well.

For those sitting on the sidelines waiting to buy a home, this could be the cool down you have been waiting for. But for anyone with a floating rate loan or mortgage, the cost to service that loan will increase if rates rise. In this case, the best way to deal with debt is to make a lump sum payment as soon as possible. This will immediately decrease the principal amount of money on which you are paying interest, making your payments more manageable

The number one message, whether rates go up or not, is the days of rock bottom rates seem to be coming to an end. And if you are currently in a variable rate mortgage, it’s probably best to lock in your rate before your rate changes on you.

But if you’re coming up to your renewal date or thinking about buying a new home soon, compare the market first and don’t get caught up in inflated rates. RateSupermarket.ca compares the market for you and finds the best mortgage rates available from lenders and mortgage brokers in your region.

Related Topics

Buying A Home / Debt Repayment / Economic News / Home Ownership / Mortgage News / Mortgages / Mortgages 101 / Refinancing and Renewing / RSM News / Selling Your Home

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