Loonie Jumps As Bank Of Canada Sends More Signals That Interest Rates May Rise

The loonie shot up following fresh signals from the Bank of Canada that it is giving more thought to raising interest rates, while Toronto’s main stock index continued its second day of declines.

The Canadian dollar was up one U.S. cent to an average trading price of 75.54 cents US, following comments by Bank of Canada governor Stephen Poloz today and senior deputy governor Carolyn Wilkins the day before that the economy is gathering momentum.

The loonie is at its highest level since late February, when it fell below 76 cents US.

If interest rates were to rise by one percentage point over the next year, Canadian households would have to spend an additional 2 cents on debt repayments for every $1 of income, according to a new RBC report.

Take Canada’s median household income of $78,870 and that increase works out to roughly $130 more in monthly debt servicing costs, Global News calculated.

That’s in a country where over half of Canadians currently have $200 or less per month to spare after paying all their bills and meeting their debt obligations, according to a recent survey conducted on behalf of accounting firm MNP.

For 10 per cent of Canadians, the financial cushion is $100 or less.

With interest rates already on the rise in the U.S. and the Canadian economy heating up, most economists expect the Bank of Canada to lift rates from historic lows sometime next year.

How will Canadian families, who have been piling on mortgage, credit card and other loan balances for a decade, cope with more expensive debt? The data points to a number of hot spots that signal potential trouble, according to RBC economist Laura Cooper "Canadians have a pile of expensive debt that’s about to become even more expensive".

The amount of interest Canadians are paying on things like personal lines of credit and credit cards is now equal to what they are channeling toward the interest on their mortgage debt, according to Cooper.

That’s because, although mortgages make up the lion’s share of household debt, so-called consumer credit is generally far more expensive. While Canadians can get a five-year fixed-rate mortgage with an interest rate as low 2.5 per cent, most unsecured lines of credit carry rates of 7-9 per cent. And interest rates on credit card debt are well into the double digits.

Source: Global News