As we begin the second quarter of 2018 there can be no doubt left, we are in a rising interest rate environment. Despite caution on the part of the Bank of Canada the improving economy in the United States and a more hawkish tone from the U.S. Federal Reserve have changed the discussion from “if rates rise”, to “when will rates rise and by how much”.
Interest rate increases in the U.S. have been pushing up the yields on government bonds there and in Canada, leading to hikes in fixed-rate mortgage costs. The U.S. influence takes some pressure off the Bank of Canada to raise its policy rate. It is worth noting that rising interest rates are not being handed to savers to the same extent that they are being passed on to borrowers.
A key factor in this will be inflation. Both the American and Canadian economies are running near capacity and employment is strong; the two main drivers of inflation. Canada just posted an annual inflation rate of 2.2%, topping the central bank’s 2% target, while U.S. inflation is running at 2.8%, also above target.
With the latest round of interest rate announcements behind us (the Fed bumped up a quarter point and the BoC was unchanged) analysts expect two, or maybe three more increases in the U.S. and two, or perhaps even just one, in Canada.