Bank of Canada Increases Interest Rates
The Bank of Canada increased its overnight lending rate by 25 basis points last week on July 12th, to 0.75% from 0.5%. It’s the first increase in seven years. The large Canadian banks reacted swiftly by increasing the prime rate by a corresponding 0.25% to 2.95%. Prime rates have an effect on the borrowing rate on variable rate mortgages , credit lines and student loans.
Governor Poloz's View::
Bank Governor Stephen Poloz indicated that the data shows that the Canadian economy has “turned the corner” to more sustainable growth.
Data Dependent Approach:
Mr. Poloz indicated that the Bank will remain ‘data dependent’. So monetary policy will not necessarily tighten further this year unless the Bank data shows such a move is warranted. Certainly inflation remains muted and below the Bank’s 2% inflation target. It has actually shown signs of decreasing lately (despite June retail sales being up slightly), but the Bank believes that is more on account of weak gas prices. Mr. Poloz is looking beyond the immediate conditions and considering where the economy will be a year or two from now. Monetary policy is an inexact policy lever, and so caution is necessary..
Canadian Debt Levels & Impact on Real Estate Markets:
Canadians have taken on a lot of debt over the past decade of low rates, and the Bank has indicated concerns that consumers could be overleveraged. Additionally, real estate prices in major markets including Toronto and Vancouver have been quite heated, although recent cooling measures introduced provincially in both Ontario and British Columbia may be having a much needed effect on sales based on most recent Real Estate Board data. It remains to be seen what effect the recent rate increase will have on home buyer's purchase decisions.
“I personally welcome this interest rate increase. It will send a signal to the markets that the Canadian economy is in better shape after the recent negative effects of the oil glut, and should also serve to strengthen the Canadian $. This may help to dampen short term foreign speculation (as opposed to longer term investment) in the Canadian real estate market, which would also be welcomed.”
Ram Rajendram is a Toronto Real Estate Broker with Century 21 Harvest Realty Ltd., Brokerage. He sells condos & houses throughout the GTA & assists home & condo buyers with their purchasing needs. He is also a Canadian Chartered Accountant (CA) & holds a Bachelors Degree in Economics from the London School of Economics (LSE)