Canadians may be about to face a reckoning if the Bank of Canada hikes interest rates next week, as many expect.
The expected hike on Wednesday - which would bring the country's first interest rate increase in nearly seven years - comes at a time when the economy still faces a number of headwinds, including weak inflation and the expected renegotiation of the North American Free Trade Agreement (NAFTA).
But with the economy and labor markets growing, the Bank of Canada began laying the groundwork for hikes with a sharp shift in tone last month. Markets are pricing in more than 90% odds of a quarter-percentage point increase on Wednesday, while a second hike is expected by the end of the year.
Economists were more divided on whether the bank would move next week, with the median forecast pointing to a hike in the fourth quarter.
Some Canadians may already be feeling a squeeze.
Canada's five-year yield has soared more than 50 basis points to 1.47% since hawkish comments from top Bank of Canada officials last month.
Royal Bank of Canada, the country's biggest bank, has already raised rates on fixed-term mortgages ahead of the central bank announcement. Mortgage rates are typically based on five-year bonds.
Experts say hat is an important signal to Canadian households that their situation may be about to change. Donald said.
While a 50-basis point increase would still leave rates at a relatively low 1%, it could be enough to prolong the recent cooling in the Vancouver and Toronto housing markets. It could also slow demand in cities that have not seen the same rapid price increases and are therefore more interest rate sensitive, such as Ottawa and Montreal.
The biggest question of all remains whether the Bank of Canada plans to stop after two rate hikes, thereby removing the stimulus it added in 2015, or whether it is embarking on a longer tightening cycle.
But for those who were able to get ahead of the curve and pay down debts, the potential higher interest rates will be more bearable.
