Bay Street May Take Rate Hike In Stride

Posted January 18, 2018

Anticipating Wednesday's rate hike by the Bank of Canada, all of Canada's Big Six banks had already raised their listed five-year mortgage rates by 15 basis points to 5.14 per cent, and that is going to make it all the more hard for home buyers to qualify for mortgages, particularly with the new stricter guidelines.

The central bank said while higher interest rates would be justified "over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target" close to two percent.

They acknowledge Governor Stephen Poloz remains concerned about levels of household indebtedness and how that will be impacted by rising rates, as well as the potential housing slowdown due to the new B-20 regulatory changes. However, it cautions about the substantial improbability linked to the possible changes of policy by the USA, which is its major dealing partner.

These increases are expected to boost the Bank of Canada's qualification rate (which is based on an average of the big bank rates) this week from 4.99% to 5.14%. On the flip side savers can expect to earn more, too.

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The trade uncertainty is expected to reduce the level of investment by about 2 percent by the end of 2019, the bank said in its Monetary Policy Report. "But in this case the rate hike itself was already reflected in market the real question on investors' minds was would the Bank of Canada provide more hawkish guidance about future rate hikes?" said Todd Mattina, a chief economist at Mackenzie Investments. It raised rates in July and September of a year ago, both by quarter percentage points.

Looking forward, consumption and residential investment are expected to contribute less to growth, given higher interest rates and new mortgage guidelines, while business investment and exports are expected to contribute more.

The Bank of Canada said the unknowns of the NAFTA's renegotiation are continuing to weigh on its forecast and have created a drag on investment and exports.

Poloz raised rates in July and September in response to a surprisingly strong economic run that began in late 2016.

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The fourth quarter of 2017 and the first quarter of 2018 are each expected to see annualized growth of 2.5 per cent.

Scotiabank Economics is forecasting 75 basis points of gradual tightening this year spread out throughout 2018, while TD Economics expects a gradual pace of tightening over the next two years of about 25 basis points every six months.

The BoC added that it will remain "cautious" in the future and will rely heavily on "incoming data in assessing the economy's sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation".

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