Canadian interest rates rose twice in the latter half of 2017 – and investors and borrowers are looking for answers to where interest rates are headed in 2018.
The Bank of Canada raised interest rates early in 2018. On January 17th, the Governor of the Bank of Canada, Stephen Poloz, announced that rates would be rising by .25% to 1.25% for the overnight rate.
This is the highest rate since 2008.
After having lowered interest rates twice in 2015 and raised them twice in 2017, 2018 looks like it will contain a more sustained rise to the overnight rate from the Bank.
Comments from the latest Bank of Canada notes show that they believe there will be a small benefit from U.S. demand for Canadian goods resulting from the recent tax changes south of the border.
However, there is also increasing uncertainty surrounding the on-going NAFTA negotiations.
The bank is projecting additional negative headwinds on business investment and trade if those negotiations fail or are extended. NAFTA was not mentioned once in BoC notes from 2017 but was mentioned twice in the most recent press release.
The consensus view is that there will be 3 - 4 interest rate increases in 2018. We believe that number will more likely be 2 - 3 raises as economic activity may be muted by NAFTA uncertainty.
Either way, rates are going higher in 2018 and will have an impact on portfolios and investment decisions.
As well, borrowers should take particular note of the potential for rising rates when entering into new loan or borrowing agreements such as mortgages.