The Bank of Canada said Wednesday that it will be watching Canadian consumers closely in the coming months before proceeding with any further interest rate increases.
The central bank’s comments came as it raised its benchmark interest rate by a quarter point for the fifth time since summer 2017, pushing up the cost of borrowing for Canadians. The Bank of Canada's benchmark interest rate now stands at 1.75%, the highest it's been since December 2008.
The central bank rate is what Canada's commercial banks charge each other for short-term loans. The big banks adjust the interest rates they charge consumers based on the movement of the Bank of Canada rate. Royal Bank, TD, BMO and CIBC have all raised their prime lending rates from 3.70% to 3.95%. Scotiabank is expected to follow suit.
Canada's central bank has kept its interest rate at record lows for several years to stimulate the economy following the 2008 financial crisis, but has since begun to move it higher as the economy gains momentum. Economists are forecasting more rate hikes in the coming year, but the central bank stated Wednesday that it wants to see how the current rate increases are impacting consumers and the broader economy before proceeding any further.
"In determining the appropriate pace of rate increases, [the bank] will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt," the Bank of Canada stated in a written news release.
In explaining its latest interest rate increase, the central bank noted the new free trade deal with the United States and Mexico as a reason for optimism about Canada's economy. The central bank also said it expects household spending to increase at "a healthy pace."
However, recent surveys indicate that Canadians are feeling a financial pinch due to higher interest rates, with nearly half of those polled saying they worry that higher interest rates could push them into bankruptcy.
