The Bank of Canada’s first interest rate hike in seven years has many implications, but Canadians are likely focusing on what it means for their mortgages and other borrowing.
While it’s a relatively small increase of only one-quarter of a percentage point, from a political standpoint it helps the Liberal government argue that its fiscal plan to turn the economy around is working.
“The move to hike the interest rate shows confidence that the improving economy is here to stay,” said RBC chief economist Craig Wright in an interview with CBC News. Such a small increase has few downsides, he said. “The majority of Canadians will not be harmed by this move.”
1. It’s a sign of a strengthening economy
The Trudeau government has been criticized for deficit spending with no plan to return to a balanced budget. Its response has been that it is making key investments to grow the economy. Almost two years into the government’s mandate, the first interest rate increase in seven years is a sign things are finally turning around.
“This is good news for Canada,” said Stephen Poloz, governor of the Bank of Canada, in a news conference Wednesday.
“The accumulation of evidence, and the growth in our confidence that the economy is on a solid trajectory, should be good news for everybody. I know not everyone will think a higher interest rate is good news, but it is a symptom of an improving economy. And interest rates are still very low,” he said.
Poloz pointed at the Trudeau government’s Canada child benefit as a reason behind the healthy growth in consumer spending and said that the Bank of Canada’s economic modelling took into account the upcoming influx of money into infrastructure spending planned by the Liberal government.
The Bank of Canada’s monetary report also said that the economic growth is not limited to one or two sectors or regions, but is broadening across the country.
2. Concern over uncertainty in the U.S. is being managed
Poloz said that part of the reason his outlook is more positive than expected is that the Bank of Canada has pushed concerns about the uncertainty of U.S. fiscal policy to the background, as it appears business leaders have done so themselves.
Business investment is improving. That, said Poloz, is an indication businesses are no longer waiting to see if a Trump administration moves on its promises to slash taxes, bring in a border tax and spend big on infrastructure.
“That uncertainty remains,” he said. “Investment in Canada is less today than it would be without that uncertainty, but people seem to be setting it aside and sort of getting on with…