Bank of Canada Hints at Looming Rate Hike
The odds that the Bank of Canada will announce a rate hike on July 11 shot up after Governor Stephen Poloz said the economy was strong enough to support higher interest rates. This in spite of mounting tensions with the U.S. and fears of an all-out trade war. Poloz’s hawkish outlook is bullish for the Canadian dollar but not necessarily good news for indebted Canadians.
Investors are increasingly certain the Bank of Canada will raise its key lending rate on July 11 after Stephen Poloz said he expects to raise interest rates because inflation has already hit the central bank’s target of two percent.
Before Poloz made those comments on Wednesday, June 27, the odds of a July rate hike stood at just over 50%. After Poloz made those comments, the odds of an interest rate hike soared to more than 70%.
The Canadian dollar responded favorably to the news, gaining 0.72% to 75.49 U.S. cents in Toronto.
The most recent economic data to come out of Canada points to a July rate hike. In April, Canada’s gross domestic product growth increased 0.1% over the previous month. While the Canadian economy slowed in April, it advanced 0.3% in March, many expected April GDP to remain unchanged.1
On a year-over-year basis, the Canadian economy increased 2.5% in April. While that marks the slowest 12-month advance since February 2017, it is still solid enough for the Bank of Canada to raise interest rates in July.
Impact on Indebted Canadians
Interest rate hikes might mean the Bank of Canada believes the Canadian economy is doing well but that doesn’t mean everyone is welcoming another rate hike. Canadian household debt stands at 168%; meaning, Canadians have $1.68 in debt for every dollar of disposable income. Moreover, 25% of Canadians say they would not be able to cover a $2,000 emergency expense, such as a car repair or losing their job.2
The Bank of Canada has already raised interest rates three times since July 2017—it currently stands at 1.25%—which caused big banks to raise their prime lending rates. As a result, a July rate hike means it is going to cost more to borrow money than it did before; and cost more to carry debt.
For those Canadians in debt or light on savings, higher interest rates could hit the Canadian economy in the form of less spending and a rise in debt delinquency rates.
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Interest rate hikes suggest the Canadian economy is doing well which in turn helps fuel the Canadian dollar. Since Canada is a natural resource juggernaut, higher interest rates will typically mean oil prices are strong too. That said, an interest rate hike could negatively impact mortgages, home sales, and precious metals. The point is, there are a lot of different ways investors can play a rate hike. And the professional traders at Learn-To-Trade.com
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- “Gross domestic product by industry, April 2018,” Statistics Canada, June 29, 2018; https://www150.statcan.gc.ca/n1/daily-quotidien/180629/dq180629a-eng.htm?HPA=1
- Canadian Press, “Key household debt ratio creeps lower in first quarter to 168%,” Calgary Sun, June 14, 2018; http://calgarysun.com/news/national/key-household-debt-ratio-creeps-lower-in-first-quarter-to-168/wcm/1682c0b9-6368-4f07-abcc-6081eb5f325d
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