The Bank of Canada raised interest rates today and questions of how the interest rate hike will affect both investments and personal household finances are continuing to shape much of the discussion on Bay Street.
A recent IPSOS poll has shown Canadian households are perhaps more indebted now than ever, with an alarming minority of Canadians now living paycheque to paycheque. Today’s interest rate hike is likely to dole out a significant amount of pain on households with high levels of floating interest-rate sensitive debt instruments such as home equity lines of credit (HELOCs) or other loans tied to the prime rate such as mortgages, car loans, and student debt.
The debt picture has traditionally been much more rosy in Canada than other relatively highly indebted countries around the world, however Canada has recently taken to spot in terms of debt load for some time now based on metrics such as household debt to GDP ratio, among others.
While some economists and analysts point to the fact that the interest rate increase was needed to keep pace with the U.S. Fed and Canadian households are perhaps not as sensitive to interest rates as one might think, the reality remains that every day working-class Canadians will need to reduce their debt loads or risk a “forced deleveraging” situation similar to what other major world economies saw approximately 10 years ago.
Invest wisely, my friends.