The Bank of Canada raised its benchmark interest rate Wednesday by 25 basis points, bringing it to the highest level in nine years.
The overnight lending rate, a key rate used by retail banks for financial products like mortgages, moves from 1% to 1.25%. That's the highest level it's been since January 2009, when rates were cut in response to the financial crisis.
In a press release, the bank sounded upbeat about Canada’s economy.
“Consumption and residential investment have been stronger than anticipated, reflecting strong employment growth,” the bank said in its statement.
The economy’s on fire
Canada’s economy has been humming in the past year. The unemployment rate has fallen to the lowest level in 40 years, while the country’s housing market has been on fire. Consumers have been happy to swipe their credit cards and spend their money.
All of this means the bank can no longer justify keeping interest rates so low. Rates are decreased in response to recessions to help increase consumer and business spending. On Wednesday, the bank said that they've seen healthy upticks on both those fronts.
This is the third rate hike the bank has undertaken in less than a year. Increases began last July, when the bank increased rates from 0.5% to 0.75%.
A reckoning for borrowers
The moves, however, could have negative effects on many Canadians. That’s because on average, Canadians carry $1.71 in debt for every $1 in disposable income they have. That has made us one of the most indebted people on earth.
Higher rates mean higher monthly costs to service any debt.
Canada’s big banks already started hiking mortgage rates last week in advance of the this week’s rate move. TD and RBC, for instance, increased their qualifying rate from 4.99% to 5.14% — meaning some borrowers now have to prove they can afford to pay an interest rate of 5.14% to afford their mortgage.
Other financial products, such as lines of credit, car loans and credit cards, can also be affected.
More rate hikes coming
The bank made it clear Wednesday that this rate hike will not be the end.
It said the economic outlook currently warrants “higher interest rates over time.” Most economists now predict we could see as many as three hikes this year — which would mean the key interest rate would move to 1.75%, a level it has not been at since 2008.
Rate hikes are not guaranteed, however, and the bank cautioned there are a few things that could prevent further hikes this year. Ongoing negotiations over the North American Free Trade Agreement (NAFTA) is a potential problem, for example. The deal between the U.S., Canada and Mexico helps facilitate trade and there is now a chance it could be cancelled. Experts predict the Canadian economy will suffer if that happens.
"As uncertainty about the future of NAFTA is weighing increasingly on the outlook, the Bank has incorporated into its projection additional negative judgement on business investment and trade," the bank said.
However, provided everything else goes according to plan, those rate hikes are coming. It's important to make sure you're prepared when they do. When rates rise, it's important to compare your financial products to make sure you're getting the best deal. Shop around for mortgage rates or move your credit card balance to a card with a lower interest rate.
Being a proactive financial consumer will be more important than ever going forward.