Rate Increase

Source: http://eldercarebroker.com/wp-content/uploads/2016/08/rateincrease.jpg

Old news by now, but if not aware, Bank of Canada increased the overnight rate by 25 basis points from a rate of 1.00% to 1.25%

I posted briefly about this as well as a link to an article by Don Pittis at the CBC outlining the headwinds the Canadian economy is facing.

Although I never commented ahead of time as to what I predicted would happen, I will say I was pleasantly surprised by the rate hike.

That is, my thought (with nothing but anecdotal evidence to support) was that interest rates would remain at 1.00% for the time being. The rationale for this was:

• There is a lot of uncertainty regarding the future of NAFTA, if this is at risk of being canceled, this could be a serious negative shock to Canada's Economy.
• Increase in the minimum wage may have a similar impact (however also may cause cost-push inflation).

On top of these two headwinds, we also have the effect that increasing interest rates have on consumption, and thus output. That is, an increasing interest rate acts as a negative shock to consumption, and thus to aggregate demand. Keep in mind, this is the big reason why the BoC wants to increase interest rates, as this effect cools inflationary pressures.

This is also the rationale I have when I state that I was pleasantly surprised by the interest rate hike. As we have watched Canadian debt levels explode over the last few years, it seems that an increase in interest rates is required to cool this growth in debt. 

What are your thoughts on the interest rate hike, with another expected 3 hikes this year, is this too much too fast or just what we need?

feel free to comment below.