The overnight lending rate in Canada is a funny thing. It seems so predictable at times, such as just a few weeks ago, when all looked rosy on the global economic horizon and it was predicted that because of that, BoC Governor Mark Carney would most likely raise interest rates as early as September. But now, with Spain and Europe heating up once again, and things not seeming so settled in the States, economists now believe that’s a harder prediction to make. That all leaves us asking the same question we’ve been asking for well over a year – what’s going to happen to interest rates? Or to us?
When looking at the predictions that the Bank of Canada will raise interest rates by at least two percentage points, TD economist Francis Fong says that there is a “substantial minority that cannot” handle an increase of that much. Mr. Fong explains that his stance falls in line with the Canadian Association of Accredited Mortgage Professionals, who say that 21% of Canadian and Ottawa mortgage holders would be in trouble should mortgage rates rise; as well as the BoC’s own predictions that 7.5% of households in the country would also be in trouble once interest rates started to balance out to normal conditions.
But will those rates rise, putting so many of us at risk, like predicted?
Mr. Fong, who believes we’d be at risk if they rose, thinks that even if they do, it will be at a slow enough pace that it would give us time to make the necessary adjustments to our personal balance sheets. Because of instability in Europe and a slower recovery in the U.S., Mr. Fong agrees with many economists that the rates probably won’t move up by a full 2 percentage points until the end of 2015. That’s not to say that they won’t raise before then; just not to a level that we won’t be able to handle.
Mr. Fong also points to the fact that Canadians are starting to rely on consumer spending less and less, and the banks are showing signs that consumers are taking on less debt. He says, “The pace of growth in household credit is no longer a reason for the Bank of Canada to move from the sidelines any time soon.” However, Mr. Fong also knows that it’s not all a bowl of cherries, either.
He says that even though Canadians are starting to cut back on their consumer spending in the way of credit cards, our mortgage credit growth has held steady at nearly 8% for three years in a row. This, he says, is an indication that while Canadians may not be so ready to whip out the plastic, they are relying more on home equity lines of credit and other mortgage debt.
