The Bank of Canada’s interest rate hike yesterday will likely result in reduced consumer spending and meek economic activity.
The 25 basis point increase brings the benchmark rate to 1.5%—the highest it’s been since December 2008.
Canadians are heavily indebted and, according to Nick Kyprianou, president and CEO of RiverRock Mortgage Investment Corporation, B-20 exacerbates the problem because people cannot refinance as easily anymore.
“The economy will slow down,” he said. “Over the last several years, people have been cranking up their credit cards and lines of credit debt, and every few months they do a refinance to consolidate the debt and then do it again,” he said.
“Now, all of a sudden, you’re not having the double-digit increases to your real estate’s value and that put an end to it. Now you’ve maxed out a couple of credit card, your line of credit is pushing the limit and you think it’s time to refinance, but when you go to do it and you’re told the value hasn’t increased, there’s no more left to squeeze. That will slow things down because they can’t spend.”
In spite of trade tensions between Canada and the United States whose president recently threatened auto tariffs on its northern neighbour, the central bank is betting that higher oil prices and a stronger American economy will benefit Canada.
Although a number of reports in recent days speculated that the Bank of Canada would raise the benchmark rate, Kyprianou didn’t think the bank would gamble like that.
“I think that with all the uncertainty with NAFTA and with the real estate market softening or flattening, because the real estate industry is a big economy driver, I thought the bank would have taken more of a wait-and-see approach,” he said. “They can always pull it back if something happens, but it makes people a little skittish.”
Now, borrowers with variate-rate mortgages are facing higher interest payments, and considering how many households carry substantial debt, that could be problematic for a great many Canadians. As Samantha Brookes, CEO of Mortgages of Canada, told The Canadian Press, that’s going to limit how much money they have to spend in the economy every month.
“Increasing rates just really limit how much they have available to them on a monthly basis,” she said.
With files from The Canadian Press