The year 2015 is expected to be the first time in five years that benchmark interest rates are moved upwards, increasing the cost of borrowing. The U.S. Federal Reserve will go first; the Bank of Canada is expected to follow.
Most analysts expect the Fed to increase its key rate, which has been near zero for six years, by a quarter of a percentage point in the spring. Then, unless there is an unexpected shock to the U.S. economy, it will likely boost it gradually throughout the year, though the top rate is still expected to be a modest 1.25% to 1.5% by the end of the year.
Canada will almost certainly follow, though with a time lag, depending on the state of the economy here.
The interest rates on consumer loans, lines of credit, variable rate mortgages and some auto loans could rise immediately. For Canadians carrying consumer debt that will mean higher payments.
One expert expects Canadians will pull back on big ticket purchases, like cars, appliances and furniture as interest rates rise.
And the biggest ticket purchase of all, housing, will not be unscathed. Overheated markets will finally cool and we may finally see the "soft landing" long predicted by the Bank of Canada and economists.
The timing of the interest rate increase – which has been predicted in past years without materializing – is no sure thing.
Although the U.S. Fed at its last rate announcement indicated it was most likely to move in the second quarter of 2015, much depends on economic indicators. Low oil prices have given a boost to the U.S. economy and left more money in people’s pockets, so there is a possibility the Fed could move even sooner.
TD Bank is predicting the Bank of Canada won’t move at the same time as the U.S. even though Canadian rates usually track what is happening in the U.S.
For Bank of Canada Governor Stephen Poloz, this will be the first time he’s wielded one of the key tools in a central banker’s arsenal – the overnight interest rate which is the rate the central bank uses to lend to financial institutions.
And he’ll have to weigh inflation that currently seems quite high against the potential economic impact of higher rates.
