How Fast Will Interest Rates Rise?

Alia McMullen

Filed under: Banks, Budgeting & Planning, Economizer, Family Finances

As expected, the Bank of Canada began to raise the country's key interest rate from its unnaturally low level Tuesday with a quarter point hike to 0.5%. The increase was almost assured after figures yesterday showed that the Canadian economy grew at a rocketing 6.1% annualized clip in the first quarter of the year.

Other signs in the economy have also heralded a rate rise: the stock market has been improving, house prices are rising steadily, consumers are spending again and core inflation is close to breaking through the central bank's comfort zone.

The hike was the first in three years and marks the beginning of a new rising interest rate cycle. But whether rates rise quickly to prevent the Canadian economy from overheating, or slowly to cushion the impact of a debt crisis in Europe, is unclear.

The central bank appears to be playing it by ear as concerns about the Greek debt crisis continue haunt the global economy, and staying flexible is a wise thing for it to do. However, investors had been expecting the central bank to give a clearer indication about the future of rate hikes and as a result the Toronto Stock Exchange and the Canadian dollar slipped on the news.

So what do Canada's leading economists expect?

A collection of economic opinion on the Financial Post's website shows a number of differing opinions about how fast rates will rise. If one thing is agreed upon, however, it is that interest rates are only going to get higher.

Are you ready to cope with higher interest rates?
Yes	39 (47.0%)
No	44 (53.0%)

Doug Porter, the deputy chief economist at BMO Capital Markets says the central bank sounded like it was almost bending over backwards to indicate that this rate hike did not necessarily mean that other rate hikes would follow quickly and aggressively. He says:

"The Bank has left its options wide open even on the July rate decision; while we still expect a follow-up rate hike at that time, we continue to believe that the Bank will take a pause at some point this year, particularly with the Fed likely on hold until 2011."

Dawn Desjardins, assistant chief economist, RBC Economics says the strength in Canada's economy will keep the central bank hiking rates throughout the year. She says:

"We expect the Bank will raise the policy rate to 1.5% in 2010 and that the tightening will continue in 2011."

However, Michael Taylor from Lombard Street Research thinks hikes will be slow. He says:

"The pace of future tightening will be modest, given that growth is likely to slow later this year amid continued spare capacity."

So generally, expect to see rates rise in quarter point increments. But keep an eye on Europe. If signs appear that the debt problems there are spreading, the Bank of Canada will hit the pause button on hikes.

Reader Comments (Page 1 of 1)

6-02-2010 @ 11:38AM

bob said...

Interesting! The bank of Canada interest rate only went up .25%. On the other hand, it was raised 100%. Double!!! I wonder if my retirement income will double?