Pattie Lovett-Reid: Benefits of a Bank of Canada rate hike
It is not all bad news if the Bank of Canada moves rates higher.
People tucking their money away in savings account or guaranteed investment certificates will see a slight uptick. It has been tough for those not wanting to take on excessive risk by increasing exposure in the equity market. For those using a hybrid product like a market-linked GIC tied to the prime rate could also see higher returns, and it might be good time to explore the financial services sector as banks tend to benefit from higher borrowing costs exceeding higher interest rate payments.
When you stay in cash and near cash equivalents after taxes and inflation, you are actually losing money in the current environment. A rate increase will be welcomed by savers versus investors – albeit it will likely be a very marginal movement, but an upward trajectory is something to pay attention to.
As we head into the summer months, our tourism industry could be challenged with the one-two punch. If rates go higher, so goes the Canadian dollar. Currency investors have already been moving into the loonie and out of the U.S. dollar, to get the biggest bang for their buck, so to speak. Cash is mobile, sensitive and scarce and investors will move in and out of a currency to get the best rate of return in a heartbeat.
Rate hikes will make the economy look more attractive but will cost more for a tourist to enjoy. On the other hand, those looking to travel abroad will benefit from a stronger dollar as their dollar goes further in popular vacation destinations.
The biggest challenge will likely be faced by Canadians who have enjoyed lower mortgage payments in conjunction with variable-rate mortgages. The big banks move their prime rate along with the Bank of Canada movements. Variable rate mortgages, home equity lines of credit and any other kind of variable rate borrowing facility is going to get more expensive.
While the Bank of Canada may only move 25 basis points, it will be a wakeup call to those who have become accustom to making minimum payments on any form of outstanding variable rate debt. The good news: those who are locked into a fixed-term mortgage still have some breathing room to get their finances in order.
What are the odds of a rate hike really happening? Right now, there is over a 80 per cent chance it will happen at the July 12 meeting, and over a 90 per cent chance come December.