A third of Canadians foresee squeeze from rate hike

The increase could add significantly to the financial burden families already bear

A third of Canadians foresee squeeze from rate hike
While the Bank of Canada (BOC) says the economy is strong enough for rate hikes to begin, the Canadian public may be seeing things differently.
In a survey of 1,150 Canadians, Forum research has found that roughly a third of respondents (34%) think the central bank’s most recent 0.25% rate hike will negatively affect their finances, according to the Financial Post.

Among those aged 35-44, 44% said the hike will have a somewhat or extremely negative effect. Thirty-nine per cent of those earning $60,000-80,000 agreed; among those earning $80,000-$100,000, 41% foresaw a negative impact.

“Given record levels of total household debt, it isn’t a surprise,” David Hogan, chief economist at Richter LLP, told the Post. “We’ve already seen some of the chartered banks increase their prime rate in anticipation of [the hike] … this makes the cost of [financing large purchases such as houses] more expensive.”

According to Patrick Ercolano, a portfolio manager at MD Financial Management, the recent increase in the cost of credit was marginal; for instance, those dealing with a 25-year mortgage worth $500,000 would see a $75 bump on their monthly payments. He also noted that higher interest rates usually indicate economic strength.

MNP insolvency trustee Joe Wilke said the severity of the hike’s impact on a household’s finances “depends how tight its budget is.” More than 70% of the respondents to the Forum poll reported increased living expenses over the past three years.

The perceived trend in living expenses differed depending on which province respondents reside in. Those from Ontario (77%), Alberta (78%), and BC (79%) were more likely to report increases, while those in Quebec and the Prairie provinces tended to say living costs have gone down.

The BOC has reported has set a target interest rate of around 4%, said Laurentian University economics professor Louis-Philippe Rochor, which he said could spell another six or seven hikes over the next few years. “The first and second hike may be fine but the third time, you might feel the squeeze,” he said.

“Interest rates are a bad way to manage an economy. It’s like using a sledge hammer to kill a fly on your table,” Rochor said. “Yeah, you’ll kill the fly but you might also kill most of your table.”

For more of Wealth Professional's latest industry news, click here.

Related stories:
Average household tax exceeds basic living expenses, study finds
Is the Canadian tax system really fair?