U.S. Fed Hikes Interest Rate by Quarter of a Percent – is Canada Next?

Canada’s largest trading partner has hiked interest rates for the third time in six months – could higher borrowing costs for Canadians follow suit?

The U.S. Federal Reserve announced another 0.25 per cent increase to its trend-setting rate today, in addition to reducing its vast bond holdings – both key strategies it undertook to preserve the economy during the Great Recession. It also indicated another rate hike to come this year as forecasted, though no insight has been given as to when.

Despite a slow economic start to 2017 and lacklustre inflation, solid gains in jobs – unemployment in the U.S. is currently at a 16-year low at 4.3 per cent – paved the way for the increase.

Putting Upward Pressure on Canadian Rates

The Fed’s move, combined with hawkish statements made this week by the Bank of Canada’s top brass, have led to strong speculation that our central bank could follow suit with a rate hike as soon as July 12. Analysts have increased the likelihood of an increase by year end – previously thought to be on hold until 2018 – from 30 per cent to 60 per cent. Rates have been held at 0.5 per cent since July 2015, following a 0.25 per cent cut in January of that year. Prior, the rate had been held at 1 per cent since September 2008.

Related Read: May 2017 Bank of Canada Rate Announcement

BoC Governor Stephen Poloz certainly helped fuel speculation of a hike in an interview this week with the CBC, stating that those recent rate cuts, which were made to counter the oil industry’s downturn, had “done their job”.

“The economy is gathering momentum and not just in certain spots, but across a much wider array,” he said. “It isn’t time to throw a party, but it does suggest that the interest rate cuts we did two years ago have done their job and that’s important to us.”

“We’re encouraged by the data and so people need to be thinking about what their finances would look like were interest rates to be a little higher when they renew their mortgage,” he added.

His comments follow an optimistic speech given on Monday by Deputy Governor Carolyn Wilkins, who hinted that the BoC’s team was in fact assessing whether a super-loose monetary policy was still necessary as the economy gained steam.

The Loonie rose following both sets of comments, though a hike as early as July isn’t necessarily a given, as “missing elements” such as exports, business investment, and question markets about trade and taxation policy south of the border, still pose economic uncertainties.

What Higher Interest Rates Would Mean for Canadian Mortgage Holders

An increase to the Bank of Canada’s trend-setting interest rate would filter down to consumer variable rates, meaning those holding variable-rate mortgages would see their rates rise in tandem. While any move made by the central bank is surely to be subtle – a quarter of a per cent at most – those could add a few hundred or so basis points to borrowing costs for mortgage holders.

It’s also likely that they’ll tread with caution, as to avoid causing debt shocks in indebted Canadian households; last month, a Manulife survey revealed three quarters of respondents could not withstand a 10 per cent increase on their monthly mortgage payments. The BoC also indicated that rising levels of household debt, combined with rapidly rising real estate prices, continue to be a main economic vulnerability in the Spring edition of its Financial Systems Review.

 

About Penelope Graham

Penelope Graham is the Managing Editor at Zoocasa. A born-and-bred Torontonian and quintessential millennial, she has over a decade of experience covering real estate, lifestyle and personal finance topics. When not keeping an eye on Toronto's hot housing market, she can be found brunching in one of the city's many vibrant neighbourhoods. Find her on Twitter at @pjeg14.