Bank of Canada boosts interest rate
Posted Jul 20, 2010 12:55:46 PM.
This article is more than 5 years old.
An increase in the Bank of Canada’s key lending rate will have little impact on consumer spending but there is a built-in message about worrisome levels of debt.
That’s the analysis from Dr. Jean-Paul Lam, assistant professor of Economics at the University of Waterloo, after the central bank hiked interest rates by a quarter point this morning to 0.75 per cent.
“Interest rates are still extremely low,” Lam explains. “So the impact on consumers and consumer spending won’t be as much as if interest rates were very high.” But Lam believes the message being sent to Canadian consumers is to be careful or think twice before taking out that mortgage or applying for that car loan because the cost of borrowing will continue to go up.
In his statement today, Bank of Canada governor Mark Carney said consumer and government spending will continue to fuel the Canadian recovery. Lam agrees. “We want people to spend so that the economy can still grow in the future,” he says. “But just be very careful about how much debt you’re going to pile on.”
Lam says the central bank is increasing rates in a bid to contain possible inflationary pressures in the future. He calls this good news and something that should boost consumer confidence because it signals the economy is on the right track.
“The global economic recovery is proceeding but is not yet self-sustaining,” Carney said. In Canada, the recovery will continue but at a slower place than the Bank predicted in April. Growth will hit 3.5 per cent in 2010, 2.9 per cent in 2011, and 2.2 per cent in 2012. It will be late 2011 before the economy regains full steam.
Lam says the message from the Bank of Canada today is mixed. “On the one hand it’s good news for the Canadian economy because the Bank thinks we’re doing well and that there are some inflationary pressures building up,” Lam says. “On the other hand, I think they are sending a signal that people should be very careful about debt levels.”
The hike continues the Bank’s movement away from the rock-bottom interest-rate policy Carney adopted during the depth of the recession. After keeping the rate at 0.25 per cent for nearly a year to bolster the struggling economy, the Bank raised its overnight rate to 0.50 per cent on June 1.
Lam thinks today’s increase reflects a prudent approach. “They are opening the door for both possibilities, that is, further increases in rates if things unfold as they are right now and maybe a pause or no increase in rates if we see further slowing down in the US economy in particular.”
The next rate setting is September 8th.
