
Does the October 24 Interest Rate Announcement Have You Spooked?
It is appearing increasingly likely that we will see another hike during the October 24 Bank of Canada (BOC) interest rate announcement.
Since July of 2017, the BOC has increased Canadian interest rates four times, with the last increase being in July of 2018 when it hit 1.5%.
The BOC maintained the 1.5% rate during the September 5, 2018 interest rate announcement. However, they warned that future increases are on the horizon.
It’s appearing that future could be soon — October 24, 2018, to be specific.
An October rate hike looks highly likely as we now have a revised NAFTA deal. The North American Free Trade Agreement (NAFTA) was concerning for the BOC, but since the new United-States-Mexico-Canada Agreement (USMCA), which replaces NAFTA, was introduced, that uncertainty has been removed.
“For the BOC, this clearly gives them a green light to hike in October and does bump the odds of further rate hikes over the year,” BMO chief economist Douglas Porter wrote in a recent note.
“While rate hikes will likely stay gradual, the pace may pick up slightly more than previously expected over the coming year.”
National Bank Financial economist Krishen Rangasamy shared a similar thought, writing that the announcement of the trade deal with the U.S. “removes the last obstacle to monetary policy normalization by the Bank of Canada.”
In addition, the Financial Post reported that inflation rates are still well above target, which is also a sign that the BOC will go for an increase. Statistics Canada also found that the Canadian economy grew 0.2% in July, led by the manufacturing sector.
Most analysts are now forecasting a rate hike on October 24, plus three additional rate hikes to come in 2019. That would bring the overnight lending rate to 2.50%, assuming a 0.25% increase per each hike, its highest level since 2008.
If another interest rate increase does happen, don’t worry — there are ways to manage it.
- Make a list of your current outstanding debts and the types of interest rates.
- If you have high-interest or variable-interest debt, look at how another interest rate hike would affect your payments.
- Consider debt reduction methods, such as:
a) Debt consolidation loan
b) Accessing home equity
c) Credit counselling
d) Filing for a Consumer Proposal
e) Filing for Bankruptcy
If interest rates do increase on October 24, it will likely be a small hike — probably going from 1.5% to 1.75%. Even so, this could affect your bank account.
For instance, say that you have $10,000 of unsecured, variable debt. At an interest rate of 1.5%, you would owe $150 on that debt, so you would have to repay $10,150.
If the interest rate increases to 1.75%, then you would owe $175 on that debt, meaning you would have to repay $10,175.
This would only be an extra $25 but (and this is a big but) that is a fairly conservative estimate.
Most Canadians have more than $10,000 worth of debt, with interest rates that are significantly higher than 1.5% or 1.75%. If you add an extra 0.25% onto that, it would increase it even more.
Plus, in most cases interest is calculated on a monthly basis, so that would be an extra 0.25% every single month. Even if you can afford that, surely that money could be put to better use elsewhere in your budget.
There is no need to be scared of the October 24 BOC interest rate announcement if you take the time to be prepared.
At Fuller Landau Debt Solutions, we can help you make that plan. We will review your financial situation and go over your options for debt management. You won’t have to worry about this interest rate announcement, or any others.
Contact us today for a free consultation. Call 416-927-7200 or visit www.fullersolutions.ca.