Rates: What goes up must come down.
Or “how I learned to stopped worrying and love the uncertainty”

In the past, the simplest way to predict what the Bank of Canada (BoC) would do with it’s key lending rate – y’know, the one that effects the cost of our credit cards, lines of credit and variable rate mortgages – was to check in with the overall strength of the Canadian economy. When things were good; high employment, strong exports, etc., the BoC would feel comfortable making money more expensive.  Rate hikes are an effective means of controlling our economy’s rate of inflation.

Being that our economy is so heavily dependent on the strength of the U.S.  the BoC has typically followed moves by the Federal Reserve. When they go up, we go up and vice versa.

Recently Canada has been bucking this trend. Despite recent rate hikes by the Fed, the BoC seems to be taking a wait and see attitude.

But why? In a word; uncertainty.

Despite the headlines, our unemployment rate is essentially flat since the beginning of 2018. Unemployment is relatively low which is good, but essentially our economy is seeing jobs shift from private to public sectors to self-employment (not necessarily in that order).

Our good friend in the U.S.
The President down South is doing a really good job of keeping the global economy on its toes. While the Trump presidency may seem ineffectual, he’s still the POTUS, if he decides to scrap NAFTA, go to war with North Korea/Syria or start a full-blown trade war with China; all bets are off for economic predictions.

High levels of Canadian household debt
The BoC is in a tricky position, torn between the need to regulate the economy against heavy inflation and the understanding that Canadians are very heavily indebted. Mortgage debt is a soft target for the media and the BoC, but what isn’t getting much coverage is the amount to which Canadians owe in unsecured debt (credit cards, lines of credit etc.).  If the BoC miscalculates and raises rates too aggressively they run the risk of triggering significant defaults on both mortgages and personal debt.

While our team has been advising our clients to expect at least two more rate hikes in 2018 – the jury is back out.

By Boyce Collins