The Bank of Canada followed through on its promise and raised interest rates by 0.25%. That’s a very small raise and now the bank rate stands at 0.75%. This is still peanuts and far from the norm of 4-5%. Even with this interest rate hike, money still remains very cheap.
During the last 8 years when interest rates have been held artificially low, Canadians have gorged themselves on loans and mortgages. Many thought higher interest rates would never happen and acquired huge mortgages and took out gigantic loans that now look like big mistakes. According to the CBC, many homeowners are nervous now and wonder what higher interest rates might do to their month to month budgets.
That’s not a surprise considering the Canadians are some of the most indebted citizens in the developed world. Despite our high debt load, our appetite for cheap money has continued to grow despite warnings from economists and watch dogs that we’ve developed very bad habits.
Higher Bond Yields
The anticipation of increased interests did crazy things to the bond market. Even prior to the announcement, short term bond yields were headed higher. Higher yields in bonds means it costs more to borrow money. It’s as simple as that.
Despite only rising 0.25% last week, short term bonds have risen over 0.5% in a short amount of time. This means that interest rates for unsecured loans, HELOCs and variable rate mortgages will immediately be affected by this rate hike.
Remember that long term mortgages are affected by the global market and long term bond prices. Interest rate increases by the Bank of Canada have a more immediate affect on short term loans and products like credit cards.
With the signal by the Bank of Canada that they will continue tightening the money supply with future rate hikes, it can be expected that interest rates for loans and variable mortgages to continue to rise.
Just a few months before the Canadian dollar was mired in a slump. It dipped down to almost 73 cents and we thought we could be seeing it slide into the 60’s with the US continuing to raise their interest rates. Well quelle surprise!
With a single announcement of a rate hike and the prospect of further hikes, the Canadian dollar jumped almost 10%. That’s a pretty steep incline in such a short period.
For Canadians looking to travel abroad, it’s made it a bit more affordable now to exchange our appreciating Canadian dollar when on the road. Even better yet, it’s summer time when kids are out and the parents are looking for somewhere to vacation. What better timing than to take advantage of our stronger dollar!
The Party’s Over?!
Just when the housing market was starting to slow down, the Bank of Canada decides to pull the rug from underneath it. With all the regulations that were put in place by Toronto and Vancouver governments the interest rate hike felt like a punch in the gut. I highly doubt we’ll be seeing any of this any time soon:
Certainly I don’t expect the real estate market to just crumble, as I’ve mentioned in one of my previous posts. Interest rates alone, especially one that rises 0.25%, isn’t enough to derail all the demand that is out there for housing. If anything, the current drop is purely psychological. That’s why housing is a pure emotional investment play with little else to go on.
What interest rates will do is slow the pace of growth a little. I doubt we’ll see 20-30% increases in home prices any time soon. That kind of growth wasn’t a sustainable for an asset that most people consider a necessity.
No Savings Rate Hike
Check your high interest savings account? No doubt you noticed no change in the interest rate you’re receiving from the bank. With the spread between interest rate charged and given so low, there’s no doubt that the banks will be using this rate hike to goose profits some more.
Don’t expect much from the banks. Savings interest rates will still remain low, so if you’re trying to make your money work for you, you’re better off building a balanced investment portfolio than sitting in cash. Heck at least the bond yields are picking up right?
Economy Getting Better?
Interest rates only go up if the Bank of Canada feels that the economy is starting to pick up steam. Certainly from the headlines this doesn’t seem to be the case, with daily layoffs at manufacturing plants and Sears letting go of a huge portion of their workforce.
It could be that the Bank of Canada is just following in the US Federal Reserve’s footsteps. Letting the dollar fall too far is a recipe for disaster as imports and food prices would skyrocket beyond belief. This means there is little benefit for the Canadian individual other than paying more interest.
It’s too hard to see where the growth is coming, but certainly in some sectors one can see it almost booming. Technology is the biggest play in Toronto and the surrounding area with the industry becoming like Silicon Valley north. If anything, the tech sector is booming, which is why some might think the economy is doing well.
With real estate and oil and gas in the doldrums, another sector will have to pick up in order for the Bank of Canada to continue raising rates. If the economy falters and the housing market does crash, the next move up for the Bank of Canada might not happen in a long time.