Should You Worry About Rising Interest Rates in Canada?

July 27, 2021

Discussing the future of interest rates in Canada

In this video, Toronto mortgage broker Chris Molder covers Canada’s current interest rates, and how the U.S. might impact Bank of Canada policy rate.

 

 

Don’t feel like watching? Find the full transcript below!

Have questions about the Bank of Canada’s plans for interest rates? This video is for you!

Are rates going to increase soon?

Chris: [00:00:00] Let’s talk about rising interest rates. We are at historical lows right now, so the million dollar question that is on everyone’s mind is: When will rates go up? So in this video, I’m going to discuss what you should keep an eye on, and who you should keep an eye on, to determine when we might see that and where the clues are. Join me.

The BOC is preparing to change the policy rate

Chris: [00:00:20] So if you’re a rates nerd like me, you pay attention to the Bank of Canada press releases that come out eight times a year. Last one came out in July. And during that press release, the bank included language about projections as to when they believe the Canadian economy will reach full capacity, and therefore the Bank of Canada would be in a position to increase the policy rate that ultimately affects the prime rate, that impacts variable rate mortgages and lines of credit. Keep in mind, the Bank of Canada does not directly influence fixed rates. There’s a relationship, but not a direct correlation there. In the last meeting, the bank very clearly projected an expectation that in the second half of 2022 they will perhaps be in a position to raise the prime rate. However, I’m going to argue with you that despite the bank’s intentions and desires – I don’t think that they’re blowing smoke – that they may not be in a position to actually change and increase the policy rate the way they expect.

How is the US involved?

Chris: [00:01:34] And one question is, why can’t the Bank of Canada raise rates on their own terms? What’s preventing them? The answer has to do with our friends to the south, our largest trading partners, the US of A.. And here’s the problem. If the Bank of Canada increases the policy rate before our counterparts in the US do, then Canadian rates are higher than the US policy rates and therefore it’ll put pressure on the Canadian dollar to increase in value vis a vis the US dollar. Now, having a highly valued Canadian dollar is really great for your cross-border shopping, and is great for your travel plans. But if you’re trying to sell goods to US customers, it totally sucks. It takes the wind out of the sails and makes your products less attractive compared to other options around the world. That is really, really bad for the Canadian economy, because if we can’t sell our goods, then our exports decrease, and that is the foundation of economic recovery here in Canada. And this is nothing new. We’ve tested this out before. Back in 2008, during the Great Depression caused by the financial crisis in the US, the Bank of Canada felt that the Canadian economy had recovered much quicker than their counterparts in the US. So back in 2010, the Bank of Canada increased the prime rate.

Chris: [00:03:07] The bank, the Federal Reserve in the United States did not increase their policy rate until six years later in 2016. And who remembers that period of 2011 to 2016? You may recall those great few months when the Canadian dollar was valued even better than the US dollar. I think at its height the Canadian dollar was worth $1.05 vis a vis the US. And again, that was great for you and me for consumers, but really bad for exports. And exports really declined during that time period. There are other factors influencing it, but one of the biggest headwinds was the Canadian dollar price. And so going forward, as we try and develop a post-pandemic recovery plan, it is going to be crucial that Canadian exports are strong. And so, again, my argument here is that the Bank of Canada, despite its intention to raise interest rates, may actually be handcuffed by the pace at which the Federal Reserve in the US increases their policy rates. So it’s definitely something to pay attention to.

Looking for more information?

Chris: [00:04:24] My name is Chris Molder. I’m a Toronto mortgage broker. If you like this content, give me a thumbs up. And if you have any questions about how interest rate decisions and policies will affect you and your mortgage, I’m just a phone call or an email away. Thanks. Bye for now.

You can contact me anytime to get started. Book a call directly via my calendar below, or get in touch with me here.

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Christopher Molder

Mortgage Broker

Christopher is a mortgage broker based in Toronto, Canada. And a son of a broker too. He’s a second generation mortgage broker. Following in his father’s steps he joined the family mortgage business straight out of university.