It was only a matter of time before interest rates would rise and this week as expected the Bank of Canada (BoC) hiked its trend-setting interest rate from 0.5 per cent to 0.75 per cent, its first move upward in the cost of borrowing in seven years.
Soon after the Bank’s announcement, all five major Canadian banks announced they were increasing their prime rates — the rate they use to set interest rates for variable-rate mortgages and other loans — to 2.95 per cent from 2.7 per cent. Thirty per cent of mortgages in Canada do not carry a fixed interest rate.
This interest rate hike is just the beginning of a series of rate hikes expected to continue in the next couple of years. For the average homeowner carrying a $450,000 mortgage, it translates into an additional $50 per month.
It also impacts thousands of Canadians with home equity lines of credit believed to account for a whopping $211 billion in debt.
The move will also affect home equity lines of credit and other loans linked to the Big Bank prime rates.
The central bank’s rate decision was taken after taking into account the growing Canadian economy which ironically has been fuelled by household spending because of rock bottom interest rates.
In the wake of the rate hike, the Canadian dollar shot up. The loonie was up 1.05 cents at 78.48 cents US as of 4:33 p.m. ET on Wednesday. The daily average exchange rate for the Canadian dollar on Wednesday was 78.16 cents US, up 0.76 cents from Tuesday’s average.
At a news conference on Wednesday in Ottawa, Bank of Canada governor Stephen Poloz acknowledged that the bank raised its key rate despite inflation currently lagging below its stated target of two per cent. Poloz said the bank considers that weakness in inflation to be temporary.
“It is worth remembering that it can take 18 to 24 months for a monetary policy action to have its full effect on inflation. This means that central banks must target future inflation by anticipating future deviations from target.”
Mortgages are Canadian families’ largest source of debt and since families have been prompted to go on spending sprees in order to furnish those first, second and third homes or renovate them all, the economy has got a massive boost.
So in a way the current economic good news is a result of offering Canadians loans at laughably low interest rates for years.
This has prompted Canadians to go out and spend big on purchasing houses which in turn caused real estate prices to rise into bubble territory. Because of affordability, Canadians have been forced to look for homes further into the suburbs leading them to look for bigger and better vehicles so auto sales have been healthy. All those zero interest enticements could be a thing of the past sooner than you think.
Canadians who use their homes as a source of cash by borrowing against their home equity could quickly owe more now that interest rates have risen, as those loans are frequently variable rate.
After variable-rate mortgages, Canadian borrowers will feel the Bank of Canada’s interest rate hike most heavily in their lines of credit, as these are linked to the prime rate.
Canadians who are about to start repaying their student loans will be affected. Floating-rate student borrowers will see their interest rate go up immediately, while fixed-rate borrowers will have to lock in their payments at a higher interest rate than they would have.
While most Canadian homeowners will probably absorb these rate hikes, it will be done by cutting back on other expenses and sacrifices.
Businesses will eventually pass on the costs to consumers in time.
How much these interest rates will affect spending patterns remain to be seen. For now most debt-carrying Canadians are forced to examine their expenses and amounts of money they owe banks, they may as well examine their consciences too while they are at it. – CINEWS