BOC vs debt levels in Canada

Today the Bank of Canada (BOC) is likely to raise its benchmark interest rates by 25 basis points. Many are looking at the language as the true determinate of the direction of the Canadian stock markets, bonds, and the dollar (CAD). The current rate hike has been priced in but markets are going to look for a conciliatory tone in the report that will determine how likely further hikes are to be. Many of these worried are around the high debt levels in the Canadian economy, some estimates around 170% of GDP. The central bank is likely to say further hikes are 'data dependent' and not have as aggressive of a tone as some fear. The board should look to see if the slowing economy is accelerated by this first hike before looking to adjust policy further. In terms of seeing how this will affect the private consumers one has to just watch the performance of the large banks.

Many of the banks have outrun the overall market in the anticipation of greater profitability in a rising rate environment. That performance can quickly change if we start to see loan delinquencies and a slowdown in lending as a result of these higher rates. A quarter basis point increase should not be the tipping point of the entire lending economy in Canada but how the bank react to the longer term prospects of more increases, especially in their management of in house prime rates on mortgages, will be the deciding factor.