The Bank of Canada recently made an announcement that experts had been anticipating for a while. The institution hiked its overnight interest rate to 1.5% which is a rise of 0.25 percentage points. To date, the interest rate stands at its highest since the year 2009 when the country was undergoing a recession.
Interestingly, the rise in interest rates indicates that the economy is doing well in the second quarter of the year 2018 and that the BoC believes it’s time to encourage people to cut back on unnecessary expenses and start saving.
The initial sentiment was that the BoC might reconsider the interest hike because of other market influencers. However, the U.S. economy is also performing well, and the new U.S. tariffs on imports of steel and aluminum from Canada have not significantly affected the economy. Accordingly, the interest hike will proceed as planned.
How Inflation Influences Interest Rates
As the apex financial institution in the country, the prime duty of the BoC is to curb inflation rates by adjusting the overnight interest rates. To boost the economy, the bank may lower interest rates so people spend more and funnel money into circulation. But, if the economy is doing well, the bank takes steps to control spending.
Experts expect that inflation will rise to 2.5%, but will drop to 2% by the second quarter of 2019. A rise in wages also results in higher inflation that currently stands at 2.3%.
Employment Conditions in the Country
According to the Labour Report Survey data released by Statistics Canada, close to 32,000 were hired in the month of June. And, although the unemployment rate went up by 0.2 percentage points and reached 6%, that was merely because more people were looking for jobs. The data also reveals that the main sectors where people took employment were manufacturing, construction, and natural resources.
Better employment is a strong indicator of good economic conditions.
Housing Market in the Country
In an effort to bring down the soaring prices in the housing market with a special focus on Vancouver and Toronto, the Office of the Superintendent of Financial Institutions had initiated steps on January 1st. These steps were intended to lower the number of mortgages by making qualifying criteria stricter. And, the estate market is indicating the impact.
As the Toronto Real Estate Board reports, home prices have been dropping in Toronto all through the first two quarters of 2018 save for the month of June when the markets saw a 2% rise in the average prices of homes in comparison to June 2017.
However, even before the markets started to recover in June 2018, experts remained unconcerned by the fall in estate prices. In fact, the Canadian Housing and Mortgage Corporation reported that the drop was more of a correction than a warning that the markets were about to collapse. And, a strong estate market is another indicator of a robust economy.
Outside of Toronto, the estate market has been recovering in most of the other regions of the country. The month of June 2018 saw a number of new housing projects beginning construction. All over the country, growth in the property sector is being noted, but at reasonable rates unlike the unprecedented boom seen in the past few years.
However, Vancouver continued to display soaring housing prices with the authorities noting that the rates had reached “crisis” levels this June.
Household Debt to Income Ratio in the Country
The income level of a household as compared to the debt it owes is another indicator of how the economy of the country is performing. According to reports released by Statistics Canada, citizens were borrowing more funds and raising the household debt. However, since they continued to earn higher disposable income as compared to the debts they were taking on; they actually had a lower debt-to-income ratio. In essence, the average Canadian citizen had bigger wallets even if he was actually spending more money.
In response to the higher interest rates and more stringent lending regulations, Canadians seem to be becoming more responsible and are less inclined to take on debt or mortgages.
In conclusion, the future of the Canadian economy looks promising!