Interest Rates

Bank of Canada leaves rate at 1%, but signals higher rates are coming

By: John Shmuel on December 6, 2017

The Bank of Canada left its benchmark interest rate unchanged at 1% Wednesday, but made it clear that higher interest rates will soon be required.

The Bank of Canada has raised interest rates twice already this year, once at its July meeting and a second time in September. That brought its benchmark interest rate to 1%, from a low of 0.5%.

While there was no hike Wednesday, there was a clear message that next year — provided nothing goes wrong — will see further rate hikes.

“While higher interest rates will likely be required over time, Governing Council will continue to be cautious, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation,” the bank said in a statement.

Moving the benchmark rate higher will begin a process of normalizing rates to pre-financial crisis levels.

But there are a lot of factors to juggle. In Toronto and Vancouver, house prices have reached record levels, and remain elevated even as a slew of new government regulations have been slapped on buyers. That has led to calls this year for the bank to hike rates to prevent a further run up.

The Canadian economy has also been on a tear lately. On Friday, the unemployment rate fell to its lowest level since 2008, dipping to 5.9% as businesses hired far more employees than was originally expected.

An eye on mortgage rates

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Mortgage rates this year have been steadily creeping up, even as brokers have pushed down their rates to try to lure customers — some have been going as low as 1.35 percentage points below the prime interest rates bank offer.

There’s real concern that raising interest rates could hurt Canadian consumers, which have run up their debt levels to a record 167% of disposable income.

Then bank on Wednesday, however, suggested that new policies announced by the Ontario and B.C. governments, along with new federal rules, are starting to tame prices.

“Housing has continued to moderate, as expected,” the bank said.

But raising interest rates will take the bank into uncharted territory. Canadians have never carried so much debt, and it’s likely many will not be able to afford their debt levels if interest rates double from current levels.

Next hike in January?

Right now, most economists are forecasting that the bank will move to raise rates at its January meeting.

Some are forecasting that we could see up to three interest rate hikes in 2018, which could take the benchmark rate to 1.75%.

The bank warned Wednesday, however, that it would watch closely to see whether any increases in the interest rate would create stress on consumers.

One thing is clear, however: higher rates are on the way.

 

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