Bank of Canada Decides to Increase Interest Rates

The Bank of Canada announced this morning that they have raised the overnight rate a quarter point to 0.75%. The central bank rate is the one that the Big 5 banks use to set their prime rate as well as their variable mortgage rates. Mortgages not linked to the prime rate (fixed interest rate) will be unaffected as they are determined more by the fluctuations in the bond market. Because the Bank of Canada’s announcement was more cautious (due to the continued global instability), bond yields have dropped since the central bank’s announcement, which means good news for fixed rate mortgages since a slight decline in the interest rates may occur.

As Jullian Beltrame of The Canadian Press suggests, an increase in interest rates drives up the cost of borrowing which ultimately could discourage consumer spending and investments. This, in turn, could hinder the current rate of Canada’s economic growth. However, even though interest rates are on the rise we must keep in perspective that 0.75% is still considered a historically low lending rate. On the other hand, it is possible that the interest rate differential with the U.S. will likely raise the value of the Canadian dollar and decrease exports to the United States.

As I previously mentioned, because the global economy is not yet self-sustaining and the Bank of Canada expects global recovery to be slower than anticipated, my assumption is that it will be a while before we see rate hikes of 50-basis points or more.

The Bank of Canada’s next scheduled overnight rate announcement will be on September 8, 2010.