What Are The Consequences of the Bank Of Canada’s Recent Interest Rate Hike?

In July, with increasing confidence in the Canadian economy, the Bank of Canada raised interest rates for the first time in 7 years.

13:27 17 August 2017

The hike, from 0.5 percent to 0.75 percent, was a long time coming, with the economy putting years of less than optimal growth behind it. Despite false starts in 2014 and 2015, BoC governor, Stephen Poloz, explained that he is convinced the economy has turned the corner this time.

The interest rate hike is a signal to investors that there is cause for optimism, and will undoubtedly have an immediate and long term impact on the economy. But what are these consequences and how will they affect your life?

 

A stronger Canadian dollar

The hike’s impact was immediately felt by the Canadian dollar (CAD), which shot up more than a full cent against the U.S. dollar. The strength of the CAD is important to those in imports/exports, as well as foreign investors. But it is also meaningful for Canadians investing outside of Canada, whose investments will have become – incrementally, for now – less valuable.

 

Less mortgage debt

The low interest rates have facilitated Canadians’ increased [] in taking on mortgage debt. This has been a boon for homeowners, investors, and construction companies. Higher interest rates will likely impact the property industry on all sides, with fewer individuals willing to risk mortgage debt.

 

Encourage savings

On the flip side, low interest rates have made it difficult to make reasonable gains on savings, as well as hampered the returns on pension funds. The hike will benefit savers, encouraging more people to invest what they have, rather than spend the bank’s money.

 

Discourage debt-fueled purchases

With low interest rates, we have seen a sustained period of debt-fueled purchases, not just of homes but of cars and other major assets. Higher interest rates will slow this trend, leading to fewer defaults on unnecessary loans. However, Canadians can still responsibly benefit from credit cards with the best interest rates.

 

Faster economic growth

While the Bank of Canada predicted 2.6 percent growth in the economy in April this year, it has now raised its estimation to 2.8%. GDP growth, on the other hand, will likely fall to 2 percent in 2018 and 1.6 percent in 2019.

 

Unemployment falls

In July, the country’s unemployment rate eased by 0.2 percent, bringing further optimism. Along with the high GDP, investors and bankers are highly confident that the economic data that the interest rate hike was based on provided a reliable estimation of the country’s best interests.

 

Another possible hike

This interest rate hike may have been seven years in the making, but the next could come as soon as September. The scheduled rate decision is on September 6, followed by another meeting on October 25. The decision to further increase interest rates is expected following the September meeting. However, there are those who urge caution, and point to signs that another hike can wait. Political and economic uncertainties in the U.S. may play a part in the decision. Either way, the economy is expected to keep growing, and the coming hike is inevitable, if not in September, in the near future.