I don’t understand. I thought I understood it, but I must be missing something. What I’m talking about is the Bank of Canada rate increases. For the second straight time, the prime lending rate has increased. Sure, it was only a quarter of a percent raising the Bank of Canada rate all the way up to .75% %, but it’s quite curious to me. I just don’t believe the current economic situation warranted it.
Especially, when they also release data at the same time they are forecasting economic growth to be slowing, due to household budget cutting. Is this an example of the cart leading the horse or is it chicken/egg syndrome? By increasing the prime lending rate, the cost of borrowing increases which makes mortgage more expensive, pushes rates on credit lines higher, and reduces the amount of cheap capital available to businesses.
This translates into households and businesses becoming more cautious and less likely to grow, to expand or to increase expenditures. All of which are requirements for continued strong economic growth. Now, since it’s not a huge rate increase, it doesn’t mean growth will move to a standstill, it will just slow down a tad. However, once again, is this the best time for that?
Perhaps what is more interesting is that Canada is the only Group of Seven country to raise their prime lending rate since the global recession started. And now it’s been twice in the last several months! What do we know that the other countries don’t? Yes, we came through the global downturn far better than perhaps any other country, but are we possibly shooting ourselves in the foot due to our own prior success?
During the first half of 2010, Canada as a whole saw a tremendous amount of growth and recovery in the 
housing markets. From Vancouver to Halifax the trend was for property values to increase with Vancouver seeing some huge jumps from the beginning of the year. Much of Canada’s economic growth can be directly pointed back to the growth in the housing market.
From the manufacturing of windows, furnaces, appliances for new homes to the actual construction involving carpenters, electricians, plumbers and more to the lawyers, realtors and banks on the back end, the Real Estate industry as a whole has a significant impact on the Canadian economy. This impact was directly responsible for much of the growth in that first half of 2010, but there are pending and newly introduced factors, such as the rate increase, that will have direct impacts on continued growth.
July brought the Harmonized Sales Tax to Ontario and BC. This tax meant to simplify some of the confusion brought about by separate Government Sales Tax (GST) and Provincial Sales Tax (PST) is directly adding thousands of dollars to home purchases. Since many consumers were aware of these pending increased costs, it helped fuel an even busier first six months of 2010. Most likely it will also lead to an even slower second half of 2010.
We’ve already seen Canada wide home pricing start to stall and even slide in some areas. Now with this new increase in rates, will it cause it to slide even further or will it just be able to maintain it’s flatness? The argument is that over the next year business and trade will provide the impetus for growth in Canada and consumer confidence will be less of a driver for economic growth, but doesn’t it go hand in hand? Happy consumers help boost business success leading to everything growing? While the rest of 2010 will once again be quite interesting, I’m just getting tired of constantly peering ahead to see what will happen and I’m really starting to yearn some consistency with the world!
My two cents… It’s no big deal. Anyone that expected (and banked on) the Bank of Canada keeping their rates at 0.25% for years is an idiot and deserves whatever is coming to them. Interest rates have nowhere to go but up. Even at 0.75%, that’s still pretty low. I take it as a positive sign that Carney is increasing the rates. That means he has confidence in the Canadian economy going forward. And he’s a pretty bright guy. I wouldn’t have the same confidence in the USA or parts of Europe. Anyone that signed a variable mortgage at P-0.6% and expected prime to be 2.25% forever…. I shake my head.
Granted a .25% increase is minimal and we all knew rates had to start moving up, but did they move up as part of an effort to show Canada is on track to the world or what was the rationale behind it? Europe, the US, some parts of Asia, they are still going to have some huge challenges and possibly several more years before they really recover.
Since we export so much product and these countries that import form us may not be bringing in as much product, our economy may need to be supported more internally over the next year or two than externally. So why increase rates and put pressure on business to grow the economy, business that depends on exports, when we need consumers to continue to drive the economy.
Also, I am not saying it has to be housing driving it as ever increasing house prices that exceed inflation rates or cost of living increases create a different trap, but at least access to credit at low enough rates it doesn;t become a burden. But perhaps I over analyzed it!
I think it was justified. But that’s me. We had great job creation in the last few months (granted minimal growth in Alberta) and our GDP for one of the recent months was 6.1%. In the whole scheme of things, I feel the BOC rate of 0.75% is still pretty good.
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