Thursday, July 13, 2017

Bank of Canada Announcement

         I recently wrote on the possible rate increase by the Bank of Canada.  This made the markets relatively quiet.  Although investors and analysts were factoring in a rate increase, there is always the possibility of a rate remaining unchanged.  Some analysts and people in the higher ups on the corporate ladder in the big 5 banks said it is not a good time to raise rates.  This is largely due to the economy in Alberta being in the gutter and the housing prices in Vancouver and Toronto.

        Although housing remain expensive in Fort McMurray and Calgary, the economies of these 2 Alberta cities is struggling.  There has hint of optimism in the air in Calgary in recent months.  The Alberta government based their budget on the price of a barrel of crude oil averaging $55 per barrel. Well, three and a half months into Alberta's fiscal year, an oil is currently trading around $46.00. The price of oil has not come close to $55 per barrel.  The price of oil actually dipped below $43.00 per barrel a few months ago.  Some analysts are predicting oil to go to $80 dollars a barrel while others believe oil will trade between $45 and $55 per barrel for the foreseeable future.

       At 10am eastern standard time on July 12, the Bank of Canada governor raised the interest rate from 0.50% to 0.75%, which is a 25 basis point increase.  This is on the heels of the Fed raising the rate in the United States recently.  Did the governor of the Bank of Canada raise the rate because the FED raised their rate?  Our economies are different.  The economic engine of Canada currently is Alberta.  With Alberta having a carbon tax along with the low oil prices, this is making companies hesitant to drill for oil.

      The increase by the Bank of Canada has lead, to no surprise, the big banks increasing their rates. So borrowing money will be more expensive for mortgages and loans.  I believe this could affect interest rates on line of credits and credit cards in the very near future.


     I believe the Bank of Canada should not of raise the rate due to the state of our economy.  Although Canada is doing well as a whole, there are provinces struggling with their economies and finances.  We hear every month recently that jobs have been created.  These jobs are often part time jobs though.  People often have to work 2 or 3 jobs to get by nowadays.  Also with part time jobs, their are no benefits which adds a lot of expenses to people who have lots of medical expenses.

    Vancouver and Toronto have home prices that are through the roof.  On the other extreme, we have houses that are super cheap as their are not buyers available.  For Vancouver and Toronto, people are paying over a million dollars on average for a home.  The mortgages will come with high payments.  With the rate increase, when it comes to a new mortgage or renewables, the payments on their mortgages will be higher.  This 25 basis point increase is the first time, the Bank of Canada has raised rates in over 7 years.

   North America, as a whole, as not seen a recession since the financial crisis of 2008-2009.  History has shown that a major recession occurs every 8-10 years.  When recessions do occur, the interest rate by the Bank of Canada and the FED usually decreases by a few percentage points.  See, the FED and Bank of Canada raises the interest rate to slow the economy.  Likewise, the effect of decreasing the interest rate, is to in courage people  to spend money as they have more money available due to lower payments.

   In the past several years, we have seen people buy homes for the first time due to the low rates.  These people might be OK now, but when time comes to renew their mortgages, their payments will be higher.  The term of mortgages are 1, 3, or 5 years.  See, a mortgage could have an amortization of 25 years but a mortgage has to be renewed towards the end of the term.  The United States, unlike Canada, can have an amortization of say 30 years and have a 30 year term mortgage. This is advantageous to US residents who take out mortgages when interest rates are low as they are right now.

   On the flip side, there is no major announcements of the banks raising the interest rate on savings account. The bank that I have my high interest savings account, if you can call it that, has not increased their rates as the time of this writing.  However, prior the interest rate hike by the Bank of Canada, Tangerine is paying an interest rate of 2.97% on new deposits up to a maximum $500000 for a few months.  Currently , the interest rate is 0.80% for Tangerine high interest savings accounts and the Tax Free Savings accounts.

   Some analysts and investors believe we will see another rate increase by the Bank of Canada this year.  This possible future rate increase is believed, by many, is going to happen in December 2017.

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.


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