As we just reported this morning, at his policy meeting yesterday, Bank of Canada governor Mark Carney and his policymakers decided yesterday to leave the overnight lending rate at 1%. While it was expected that no move would be made, what was surprising to some was optimistic sound of his report, making note that “headwinds” in Europe were abating and that the U.S. was making a much quicker recovery than what was expected. Those comments, along with the fact that Mark Carney has been increasingly frustrated with the amount of debt we’re taking on, have many predicting that the rate hike that was predicted in 2013 is going to happen much, much sooner than that. And some, such as Laurie Campbell at Credit Canada, thinks the results from the early hike will be “frightening.”
Ms. Campbell says, “People have banked on rate increases not happening until 2013. There has been so much crying wolf. We have been hearing for so long that interest rates can’t stay low forever. I don’t think people will take it seriously until they get their statement or see their mortgage go up.” But she says, that’s not the worst of it. “I think it is going to be frightening. It’s not just mortgages, it’s lines of credit where people have dumped their credit card debts. It’s home equity lines of credit that are sitting at variable rates.”
While the increase in rates won’t affect fixed-rate mortgage debt, such as home equity loans, for the time-being, there are still many Canadians that have variable rates on some kind of mortgage. According to the Canadian Association of Accredited Mortgage Professionals, 31% of first and second mortgages are currently held at variable rates.
But, is the situation really so dire?
TD Bank chief economist, Craig Alexander, doesn’t think so. Mr. Alexander made headlines several weeks ago when he called for the BoC Governor to increase the rates only to receive backlash from both Mr. Carney and Finance Minister Jim Flaherty. After the report was released yesterday, he also weighed in on the issue, saying that Canadians need to relax. And that while rates may rise, it’s more likely going to feel like a pinch rather than a punch.
“We need to keep in mind the bank also probably isn’t going to take rates from where they are today right up to their neutral level,” he said. “The odds are we are going to see them rise a bit and wait and see how the economy responds to the higher rate.”
