Recently, Bank of Canada governor Stephen Poloz announced an increase in the interest rate from 1.25% to 1.5%. The increase comes as the Bank of Canada predicts a continued growth in the Canadian economy from exports and business investments. However, household spending may represent a smaller percentage of future economic growth due to the effects of a higher interest rate on consumers given that variable-rate holders may be forced to put their money elsewhere.
An increase from the Bank of Canada usually comes with increased costs for consumers. If precedent holds, the rise could lead to financial institutions increasing their prime rate, which results in Canadians paying higher borrowing costs on financial products, such as variable rate mortgages. Financial institutions have raised their prime interest rates three times since last summer, which is in line with the Bank of Canada’s increase. This may raise concerns for Canadians, as a number of mortgage holders are worried that rising interest rates could affect their ability to repay debts. In a recent consumer debt index, 43% of surveyors said they are feeling the effects of higher interest rates – a 5% increase from just three months ago.
The impact of the increase on M&A activity cannot be understated either, as a healthy economy from rising exports and investments could result in a higher number of acquisitions, given the increased optimism in the Canadian economy.
The Bank of Canada has three additional rate announcements scheduled for this year. They are set for September 5, October 24, and December 5. Stay tuned.
The author would like to thank Manon Landry, summer student, for her assistance in preparing this legal update.
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