Last week the Bank of Canada hinted that the time may have come for an increase in interest rates. Low inflation and strong GDP figures were cited by the Bank of signs that economic growth was accelerating and that a variety of economic sectors were doing better than was the case previously. In Quebec, the unemployment rate has reached record lows at 6% and in Ontario, the unemployment rate has reached 5.6% with the government finally managing a balanced budget. The Bank clearly feels that the economy is now strong enough to absorb any of the increased pressure and costs from higher interest rates.
The second reason the Bank may raise rates on July 12th is that the United States Federal Reserve has begun a slow but steady process of gradually returning interest rates to a more historical normal following almost 10 years of record low rates. If rates continue to increase in the United States without a similar change in Canada, our dollar will devalue and inflation and prices will increase as the U.S. dollar increases in value. Tembo has previously outlined a blog showing the broad history of interest rates in Canada, emphasising that the last 10 years have seen some of the lowest interest rates in our history, similar to what has occurred in America. Record low rates were implemented to stimulate the economy from the recession of 2008.
Bank of Canada Governor Stephen Poloz has repeatedly warned Canadians that their debt levels, particularly mortgage debt, has reached unsustainable levels. The Bank understands that while record low rates have helped consumers, corporations, and governments manage the fiscal and economic challenges of the last recession, they have also encouraged Canadians to borrow tremendous sums of money. It is possible that the strong economic figures mentioned earlier have convinced the Bank that now is the time to send a stronger signal to consumers that the costs of borrowing can not and will not remain at record lows forever.
Higher interest rates will result in higher mortgage costs in the short term for variable mortgage holders and in the long term for those homeowners with fixed mortgages. Tembo has anticipated the possibility of higher rates and has written a blog outlining several tips to help individuals and families save money by preparing for higher debt servicing costs. After almost 10 years of record low rates, it now appears that the Bank of Canada has decided to return rates to historical averages.