Bank of Canada Tightening – September 2017
Yesterday the Bank of Canada raised its key rate to tighten monetary policy in Canada. Many economists and investors thought that the BoC would leave the rate alone and not hike it two announcement dates (July & September) in a row. There has been a few quarters of healthy economic growth and BoC decided to be hawkish towards keeping inflation in check. Concerns now arise on how an increase in the Key Rate and thus a strengthened Canadian dollar will affect exporters and manufacturers who have had a difficult time recovering from the loonies’ heights in 2012/13.
The Bank of Canada said it is not following a specific plan to implement future interest rate hikes. Rather, it reiterated that future decisions will be based upon economic data and financial markets, and how they may have an impact on inflation.
By pushing its Key Rate higher now while it can, BoC gives itself room to lower the rate when the economy slows down in future, which based upon a slower housing market could be a medium term concern.
Major FI’s have correspondingly indicated raising their Prime Rate of lending. With this increase the Prime Rate will be (3.2%) slightly higher than where it was from 2010 to the end of 2014 (3.0%).
Mortgage Logic’s view is that a variable/adjustable rate debt strategy for those with a sound financial profile remains optimal. The tradeoff of flexibility and long term savings in a floating rate outweigh the rate premium and inflexibility of a fixed rate.