Last Wednesday, The Bank of Canada raised its benchmark interest rate to 1.25 percent, the third interest rate hike over the past year, and the highest level since the global financial crisis in 2008. According to the official press statement released by Bank of Canada, “the economy is operating roughly at capacity, with inflation being close to target and the global economy continuing to strengthen”. The hike was anticipated by economists especially after the nearly 160,000 jobs that were added between November and December alone, pushing Canada’s unemployment rate to 5.7 percent, the lowest level since 1976.
Many economists still believe the central bank will raise its rates at least two more times this year, however expectations are being tempered after The Bank of Canada released commentary potentially dumping water on a swifter three-hike-expectation in 2018.
According to The Bank of Canada, concerns about the “uncertainty of NAFTA is weighing increasingly on the outlook.” Fear of the US massively altering or all together pulling out of the North American Free Trade Agreement seems to be spooking the Bank of Canada’s positive outlook for Canada as the impacts are largely still unknown. In terms of an interest rate forecast, the NAFTA discussion will likely affect the timing of the next interest rate hike, originally expected for March. According to Sebastien Lavoie, Chief Economist at Laurentian Bank, “if a new restrictive trade agreement becomes reality, Canadian real GDP growth could come up short of expectations, notably through weaker Canadian exports and less capital investment from companies in Canada.” As a result, The Bank of Canada will be forced to keep interest rates low until it can expect for further increases in 2018. The unlikely downside are the reverberating implications for our Canadian dollar.
After the announcement of the interest rate hike, Canada’s biggest banks all increased their own prime lending rates by a quarter percentage point, sitting now at 3.45 percent. The interest rate hike will immediately impact variable rate mortgage holders, pressuring the wallets of already indebted Canadians. A recent Global News article highlighted an IPSOS poll conducted by MNP, which stated “77% of Canadians would be unable to withstand a $130 month increase in their interest payments,” according to respondents.
Prior to the interest rate hike, RBC, CIBC, and TD Bank increased its qualification rate from 4.99 percent to 5.14 percent. Coupledwith the new OSFI rules calling for tighter lending standards that force buyers to stress test their ability to pay off interest, Canadian’s buying power has already fallen 1.4%. With higher interest rates coming ahead of a potential shake up from NAFTA discussions, Canadians are now facing both higher interest payments and a cloudy future.