Newspaper article The Canadian Press

Is 2015 the Year the Bank of Canada Finally Raises Its Key Interest Rates?

Newspaper article The Canadian Press

Is 2015 the Year the Bank of Canada Finally Raises Its Key Interest Rates?

Article excerpt

Is 2015 the year Bank of Canada hikes rates?

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OTTAWA - After 18 months on the job, Bank of Canada governor Stephen Poloz has yet to wield the primary tool at his disposal: the key interest rate.

When Poloz took the bank's reins in June 2013, he inherited an overnight rate set nearly three years earlier by his predecessor Mark Carney. That rate has yet to budge from one per cent, idling for one of the longest stretches in Bank of Canada history.

With Canada's economy showing signs of recovery, could 2015 be the year Poloz starts hiking up the central bank's trend-setting rate and, if so, when?

"I don't know how itchy his fingers are to start moving that dial," said Bill Robson, the president of the C.D. Howe Institute think-tank.

Robson, however, believes it will happen sometime in 2015 thanks to an increasingly positive economic outlook, including an improving U.S. economy and a pickup in Canadian exports.

Once the bank's overnight rate starts to creep up, Canadian businesses will see their borrowing rates rise as will consumers who take out car loans and mortgages.

Ian Lee, a professor at the Sprott School of Business at Ottawa's Carleton University, predicts businesses will feel the sting of higher rates right away, but he expects the effect on households to be much more muted.

Many consumers, he added, will avoid a sudden jolt because of fixed-rate loans and mortgages.

On top of that, Lee said the rate would likely inch up a quarter-percentage point at a time, making the coming increases easier to manage than the towering Canadian levels of the early 1980s.

Lee, a mortgage manager at the time, recalled how rates soared to 20 per cent in 1981.

"When I hear people ... getting all excited saying, 'Gee whiz, rates might go up to three or four or five per cent' -- I mean, I almost laugh," Lee said.

"And not because I'm saying it's trivial, but what I mean is: the Canadian economy and the Canadian people experienced far more savage interest rates."

Lee said the rate hikes in the early 80s killed the real-estate market, but didn't create a housing meltdown and the number of foreclosures barely increased.

On the flip side, higher rates would help pension funds reap a bigger return on their investments, Lee added.

McGill University economics professor Christopher Ragan said, fundamentally, rising rates are a good thing.

"It is signalling a stronger economy," he said.

The Bank of Canada said last week the country had showed signs of a "broadening recovery" and the output gap appeared to be smaller than it had projected just six weeks earlier. The output gap represents the divide between where the economy stands at a given time and where it would be when performing at its full potential.

However, the bank's statement offset the positives by pointing to potential threats: weakening oil prices that drive down inflation and the significant risks of high household debt accumulated during years of low borrowing rates. …

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