The delicate flower that is the Canadian economy received a bit of a gentle shaking this week when the Bank of Canada raised its key interest rate for the first time in seven years. The big banks responded immediately by hiking their prime rates. The increases were relatively tiny, but the worry is that it might be the start of a very difficult road ahead.
25 basis points is a fraction of one per cent, but it will cost provinces like Manitoba and Saskatchewan millions of dollars over the next year just to service their debt. I am fortunate not to have any personal debt, but many millions of Canadians are heavily indebted, right up to their proverbial eyeballs.
That monthly payment on a variable rate mortgage has gone up by 25 or 30 dollars. If there’s another rate hike before the end of 2017, the monthly expense will go up by twice as much, or more. Then watch the infamous ‘multiplier’ effect go to work, as thousands of Canadians put off buying that new refrigerator, or think twice about dining out in a restaurant as often.
It might mean shortening a planned vacation, or cancelling plans to build a garage. All of these individual decisions have an impact on someone else.
So, how is it that the tall foreheads at the Bank of Canada came to the conclusion that it was time to raise interest rates?
Historically, they raise rates because the economy is starting to heat up, and they’re worried about inflation. Then the rates go up and the cycle starts to move in the opposite direction.
A little less than two years ago, Justin Trudeau won a majority government by promising to run deficits. He said it would help create middle class jobs for Canadians, and it was a great time to borrow money for infrastructure projects because interest rates were at historic lows.
Hands up those of you who understand all of this, and believe it.
I would be much obliged if you would stay after class and explain it to me.
I’m Roger Currie