As we suggested in our weekly client webinar yesterday, current core consumer price data will hold the BOC's policy interest rate at 1/2% as the key data remain below the bank's 2% target.
For those of you who have debt, it remains best to continue to keep it at a floating rate (which is based on prime and is set based on the Bank of Canada's policy interest rate) if it makes sense for your personal situation: this is something that you should of course discuss in more detail with your Certified Financial Planning (CFP) professional.
If you need one, let me know, I know a really good one.
We (at High Rock) have been focusing on debt and interest rates as a key theme for 2017. CBC reported yesterday that a Manulife Bank survey has suggested that when interest rates do rise:
"Almost 3/4 of Canadian homeowners would have difficulty paying their mortgage every month if their payments increased by as little as 10%".
That would be a $200 increase on a $2,000 monthly payment.
This is certainly something that has raised red flags at the Bank of Canada and should definitely be of concern to policy makers and lenders that when it does come time to raise rates that the fall-out could be particularly severe.
This is why we have to keep a close eye on the Bank of Canada's core rates of inflation. Should they start to elevate above the 2% target level, the BOC may have little choice over the necessity to raise interest rates as their mandate specifies that their job is to maintain price stability. Raising rates and tightening monetary policy is the tool that they will use to counter inflationary trends (if and when they begin to appear).
What will happen if they have no choice but to raise rates should leave anyone with significant equity tied up in their homes feeling a tad squeamish. The report from Manulife highlights this. If you can't afford your mortgage payments, the banks become less friendly. If close to 3/4 of homeowners can't afford their mortgage payments, it will not be pretty.
For the moment, Canadian interest rates will remain where they are (and the good news is that debt servicing at current levels remains affordable), but we need to be vigilant on the inflation indicators and Bank of Canada monetary policy for what may come next.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist