They said they would, and they did! The central bank raised its rate by 0.25% on Wednesday. Thanks to the humming Canadian economy and global economies, the rate was increased to 1.5%.
Every six weeks the Bank of Canada meets to decide whether to raise or lower its interest rate, known as the overnight rate, using economic growth and activity to make this decision. The central bank has raised its rate 4 times, each by 0.25%, since last summer. This rate is the interest that retail banks are charged for short term loans, and affects what its customers pay on mortgages, lines of credit and savings accounts. After the announcement, Royal Bank of Canada, TD, and BMO raised their Prime rates in response, and other banks quickly followed suit.
The Bank cited a couple reasons for its decision to raise the rate. First, the global economy is doing well–and expected to grow by 3.75% this year–while the US economy is proving stronger than expected. Second, based on numbers from Statistics Canada, our economy continues to grow close to capacity–with exports continuing to be buoyed by strong global demand and higher commodity prices–bringing inflation close to the Bank’s target of 2%. The bank also noted that the housing market is stabilizing and businesses are starting to spend again, both good signs for the economy. The Bank of Canada tends to hold or cut its rate when it wants to stimulate the economy, or raise it when it wants to slow down inflation.
Despite the good news, not all economic worries have been put to rest. For one, the rising US dollar, combined with concerns about trade actions, have put downward pressure on the Canadian dollar. But despite this, the bank does not think the impact will be severe. “Although there will be difficult adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest,” the bank said. However, Bank governor Stephen Poloz said trade tensions were “the biggest issue” on the minds of policymakers in recent weeks.
Household spending is being dampened by higher interest rates and tighter mortgage lending guidelines, and trade tensions are weighing on investment in some sectors. Regardless, the Bank warned that we should be prepared for higher rates to come–as they’ll be needed to keep inflation in check. The bank expects Canadian exports to shrink by 0.6% at the end of 2018 because of tariff changes, and imports will be similarly affected. That’s $3.6 billion less going out and $3.9 billion less coming in, which will in turn bump up consumer prices. These projections are based solely on what has already happened and do not take into consideration other developments such as the possibility that Trump may place a 0.25% tariff on Canadian made vehicles. But, Poloz said that they “felt it appropriate to set aside this risk and make policy on the basis of what has been announced.”
Brian DePratto, TD Bank economist expects the central bank to keep moving ahead cautiously, keeping a wary eye on trade issues while bumping up its overnight rate whenever it can without hurting the economy.
“We still look for more hikes, but think a gradual pace of one hike roughly every two quarters makes the most sense,” he said. “NAFTA resolution and/or receding trade threats would certainly lay the ground work for an additional hike this year, but we won’t hold our breath.”
While it’s true anything can happen, if you’re a variable rate holder you may want to consider increasing your mortgage payment now, to both acclimate yourself to higher rates and to pay down a bit of extra principal in the process. If you’re feeling the pinch of higher interest rates, please feel free to give me a call at 403-241-3255 and we can discuss the options available to you.
The next Bank of Canada interest rate announcement will take place on September 5, 2018. You can find this BoC announcement in its entirety here.