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Bank Of Canada Beging Interest Rate Hikes With First Increase In 7 Years

OTTAWA — The Bank of Canada hiked its benchmark interest rate Wednesday for the first time in nearly seven years in what may be the beginning of the end of the era of cheap borrowing that has fuelled the hot housing market and record levels of debt.

The central bank raised its key interest rate target to 0.75 per cent from 0.5 per cent, the first increase since September 2010, amid rising confidence the economy has turned the corner and expectations of stronger growth ahead.

“The economy can handle very well this move we have today,” governor Stephen Poloz told a news conference in Ottawa.

He cited the central bank’s “bolstered confidence” in the country’s economic outlook, including brighter prospects for exports and business investment, compared to the beginning of the year.

Canadians have lived in a historically low-interest environment since the Global Financial Crisis of 2008, when the Bank of Canada overnight rate fell from 4.50% to an all-time low of 0.25%.

Homeowners with variable/adjustable rate mortgages will likely see their rate and possibly payments increase. Home Equity Lines of Credit and Personal Lines of Credit will also be affected.

Based on recent public statements made by the Bank of Canada, some economists are predicting that this may be the beginning of a string of rate increases because of strong economic data and solid employment numbers. However, inflation is running well below the Bank of Canada’s target at 1.3%

But GDP is rising and the Bank’s Governors seem to feel it will continue to do so, despite weak oil prices and trade uncertainties with the U.S. That said, economists are mixed on the timing of the next rate increase, so we will continue to watch for indications from the BoC.

The Bank of Canada cut interest rates by a quarter of a percentage point twice in 2015 to help the economy deal with the plunge in oil prices. But Poloz said the economy no longer needs as much stimulus.

The hike, while incremental, prompted the country’s big banks to raise their prime rates, which are used as a benchmark for variable rate mortgages, home equity lines of credit and other loans.

Even with the increase, interest rates remain low from a historical perspective and Poloz said Canadians should be prepared that rates will rise further at some point in the future.

“People need to understand that in the full course of time I don’t doubt that interest rates will move higher, but there’s no predetermined path in mind at this stage,” he said.

Scotiabank chief economist Jean-Francois Perrault said he expects Wednesday’s announcement marks the start of a gradual cycle of rate hikes.

 

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