We recently covered the news surrounding the speculation of an interest rate hike by the US Federal Reserve and not only is Canada positioned for a potential rise in our lending rate as well, but our rate is closely tied to the interest rate in the states, largely because of the power it has to weaken the Canadian dollar and increase Canadian exports and business development.
Why is a rise in our interest rate important to understand? Because this is the base rate that determines what the lending rate will be that banks offer its customers – us. For example, if interest rates rise, then those who have recently taken on mortgages with variable rates will see an increase in their monthly interest payment to their lender – this is why a fixed mortgage is often preferable even though the rate is higher than a variable rate mortgage, you avoid risk. (More on mortgage rates here.)
Why does the interest rate change? Read here.
Our Bank of Canada (BoC, with HQ pictured above) policymakers will be meeting tomorrow to determine the direction of the rates – which I don’t understand because a big economic indicator (a key statistic that indicates the direction of the economy), will be released on Friday: the jobs report (employment data), from Stats Canada. To me that’s like going to buy new shoes on Wednesday when the sale is on Friday. Guess they have other things to discuss anyway. I digress.
Expectations are that the August jobs report will show a gain in number of positions available in Canada putting our unemployment rate at about 6.8 per cent, which would insinuate a stronger economy and therefor an upward move in the interest rate.
Our current interest rate, similar to the US, is at 0.5% and has been since July 2015 after oil prices tanked globally and sent our economy into a “technical recession” last year. I say technical recession because the economy did contract, or shrink, enough in the first half of 2015 to qualify as a recession, but the average Canadian did not feel it: jobs were not lost, mortgages were not defaulted on and stocks did not plummet – with the exception of oil stocks. Alberta would completely disagree with this what recession? statement as their provincial economy basically depends on a strong oil price. (You can read more about the 2015 recession here if you like.)
Overall, a rise in the interest rate is positive because it means that our Bank of Canada views our economy as growing in strength and stability.
Read the original article by Gordon Isfeld, published in the Financial Post on Sept. 5 2016, here.
Image via D. Neuman on Flickr
