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Sink or Swim? Bank Of Canada Interest Rate Increase

Just as expected, the Bank of Canada announced another interest rate hike last week. The interest rate increase pushed the overnight rate to 1.75%, the fifth increase in just over a year. The overnight rate has more than tripled since bottoming at 0.5% in early 2017. 

This intetest rate increase is exposing growing concerns over average Canadian households and their ability to swim in the debts amongst rising interest costs. It is said the banks desire to reach their neutral rate of between 2.5-3.5%. Recent economic data from the household sector, which has historically been responsible for just over 60% of GDP growth, suggests average households are drowning out in debt. 

National home sales have now sunk to a 6 year low, with particular weakness in both Calgray and Greater Vancouver, where home sales sit at 18 and 22 year lows respectively. The resulting slowdown has prompted savy home builders to start tredding water instead of sprinting like they did 2 years ago as CMHC reports.

Auto sales have declined for seven consecutive months and retail sales volumes have fallen in each of the past three months, now growing just 0.7% Y/Y compared to the greater than 8% growth just over a year ago. 

Total household credit was up just 3.6 percent in September from the previous year, the slowest annual growth since 1983, according to data released Friday by the Bank of Canada. That’s a marked slowdown from 5.8 percent in the middle of last year, and less than half the 8.1 percent historical average. The amount of household credit outstanding, including consumer credit and residential mortgages, is now C$2.15 trillion ($1.64 trillion).

Sources and fruther relevant data:

1. Household credit growth in Canada hits its slowest pace in 35 years.

2. Non-permanent resident growth as a share of total population growth hasn't been this strong since Canada's last housing boom in the late 1980's. What will happen to this cohort if job growth slows?

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