In­ter­est rate to rise

Bank of Canada ex­pected to raise its key rate for first time in nearly seven years

The Guardian (Charlottetown) - - BUSINESS - BY CRAIG WONG

The Bank of Canada is ex­pected to raise its key in­ter­est rate tar­get for the first time in nearly seven years on Wed­nes­day fol­low­ing signs the econ­omy is well on the road to re­cov­ery af­ter the crash in oil prices.

Low in­ter­est rates have helped fuel the hous­ing mar­ket in re­cent years, in­cen­tiviz­ing Cana­di­ans to pile on record lev­els of debt — some­thing that the cen­tral bank has noted as a sig­nif­i­cant risk for the econ­omy.

Rates for new fixed-rate mort­gages have al­ready started to rise in an­tic­i­pa­tion. A hike by the Bank of Canada will likely prompt the coun­try’s big banks to raise their prime rates, a move that will in­crease the cost of loans such as vari­able rate mort­gages and home eq­uity lines of credit.

James Laird, co-founder of in­ter­est rate com­par­i­son web­site Rate­Hub, said the care­fully crafted lan­guage the Bank of Canada uses Wed­nes­day will be key in read­ing the tea leaves of fu­ture rate de­ci­sions.

“Any ad­di­tional com­ments for fu­ture in­creases will be the real trig­ger for more fixed rate in­creases fol­low­ing the an­nounce­ment, rather than the rate change it­self,” Laird said.

The po­ten­tial rise in the cost of bor­row­ing comes amid signs the hous­ing mar­ket, a key eco­nomic driver in re­cent years, is adapt­ing to govern­ment changes meant to cool the real es­tate sec­tors of Toronto and Van­cou­ver.

Sales and prices have fallen in Toronto in the wake of new rules brought in by the On­tario govern­ment, in­clud­ing a tax on for­eign buy­ers.

Van­cou­ver sales, where new mea­sures in­clud­ing a sim­i­lar tax were im­ple­mented last sum­mer, also stalled in the months that fol­lowed, though there are signs the mar­ket may be re­bound­ing.

Spec­u­la­tion about an in­ter­est rate hike comes amid a flurry of strong eco­nomic news this year, with hous­ing starts fig­ures for last month re­leased Tues­day by Canada Mort­gage and Hous­ing Corp. am­pli­fy­ing that.

Sco­tia­bank deputy chief econ­o­mist Brett House said the dif­fer­ence be­tween the ac­tual and po­ten­tial out­put of the econ­omy is nar­row­ing rapidly, so he ex­pects the cen­tral bank will move now to keep in­fla­tion in check.

“We do be­lieve that this is the be­gin­ning of a grad­ual hik­ing cy­cle from the Bank of Canada,” House said.

The Bank of Canada cut rates twice in 2015 in an ef­fort to off­set a dra­matic drop in oil prices, bring­ing it to 0.5 per cent. Gover­nor Stephen Poloz has said those mea­sures ap­peared to have done their job.

While in­fla­tion re­mains well be­low the cen­tral bank’s tar­get of two per cent, Poloz said in a re­cent in­ter­view with a Ger­man news­pa­per that if the cen­tral bank only watched and re­acted to in­fla­tion, it would never reach its in­fla­tion tar­get and it would al­ways be two years be­hind in the reaction. He said he has to look at other in­di­ca­tors in the mod­els that pre­dict in­fla­tion.

FILE PHOTO

Bank of Canada gover­nor Stephen Poloz is ex­pected to an­nounce to­day that the cen­tral bank’s key in­ter­est rate tar­get will rise for the first time in nearly seven years.

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