COLUMN: Higher interest rates will slow B.C. economy after ‘unusually robust’ show

COLUMN: Higher interest rates will slow B.C. economy after ‘unusually robust’ show

Jock Finlayson is executive vice president and chief policy officer of the Business Council of BC

By Jock Finlayson

When it hiked its short-term policy interest rate in late October, the Bank of Canada signaled that an extended period of “money for nothing” – the lowest interest rates in Canadian history – had finally and definitively come to an end.

Last month, the central bank lifted its benchmark overnight rate to 1.75 per cent, which is up from a record low of 0.5 per cent in the summer of 2017. Over the past 15 months, the Bank of Canada has nudged its policy rate steadily higher, albeit in baby steps. Why does this matter?

READ MORE: Bank of Canada hikes interest rate to 1.75%

The reason is that many other interest rates in our economy, including mortgages, lines of credit, and the rates paid on savings accounts and Guaranteed Investment Certificates, are influenced by the Bank of Canada’s rate-setting decisions.

So, as the central bank has been raising its benchmark rate, borrowing costs for consumers, home-buyers, businesses and governments have been rising in tandem. To a lesser extent, savers have also seen slightly higher returns on the money they hold with banks, credit unions and other financial institutions.

Based on statements from Bank of Canada governor Stephen Poloz and his colleagues, it appears that the bank expects to keep interest rates on an upward trajectory in 2019-20. Of course, this assumes the Canadian economy continues to post modest growth going forward.

READ MORE: Feds to release fall economic update Nov. 21

Some prominent forecasters see the bank’s benchmark policy rate approaching three per cent by mid-2020. If so, the market-determined interest rates facing households and businesses are likely to keep climbing for a few more quarters at least.

The shift from years of rock-bottom interest rates to somewhat more “normal” rates will have widespread effects across the economy. With the cost of credit escalating, consumer spending in Canada is set to slow. So too will key measures of real-estate-related activity, as rising mortgage rates take a bite of housing demand and quash speculation.

British Columbia is more vulnerable than other provinces to the tighter financial conditions being engineered by the central bank.

READ MORE: Housing slowdown forecast to cool B.C. economy

With the most expensive homes in the country, B.C. also “leads” in the amount of debt accumulated by consumers and households – both in absolute terms, and relative to household incomes.

Mortgages make up more than two-thirds of household debt. Thus, costlier real estate means bigger mortgages and a higher debt/income ratio for the average B.C. household.

Estimates suggest that 70 per cent of Canadian households with five-year fixed mortgages as of 2017 will have renewed at a higher rate by the end of 2020. Around one-fifth of these households are in B.C. People with variable rate mortgages will also be paying more in interest costs going forward.

What do higher interest rates portend for the province’s economy as a whole?

First, like Canada, B.C. will see a downshifting in the growth of consumer spending – a trend that is already evident in the data on retail sales in 2018.

Second, housing markets, which have softened in 2018, should stay subdued for some time, as mortgage rates edge up and more restrictive federal government rules on mortgage financing continue to weigh on lending. The NDP government’s measures to curb housing demand and increase the tax burden on expensive properties are also playing a role in taking the froth out of the real estate sector.

Overall growth in the B.C. economy is poised to slow after the unusually robust performance seen in 2016 and 2017.

For 2018, the Business Council of B.C. projects a 2.3 per cent increase in inflation-adjusted gross domestic product, down from average growth of 3.8 per cent over the previous two years.

In 2019, we anticipate a small pick-up in economic activity, fueled in large part by higher investment spending – specifically, the start-up of LNG Canada’s massive gas liquefaction project in Kitimat, by the middle of next year.

READ MORE: Kitimat gets first look at LNG Canada timeline

Looking ahead, it is clear that B.C. will have to rely more on non-residential investment and exports to underpin an expanding economy, as the province moves away from the real estate-centric growth model that prevailed during the era of record low interest rates.

Jock Finlayson is executive vice president and chief policy officer of the Business Council of British Columbia

Like us on Facebook and follow us on Twitter

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

The Village of Salmo has told Cody Puckett and Ashley Nelson that clearing land at this property doesn’t constitute building a property according to a bylaw. Photo: Submitted
Work in progress? Salmo family, village at odds over property construction

Cody Puckett says he’s being evicted from his own land, which the village disputes

Finn Lydon. Photo: Submitted
UPDATE: Winlaw boy reported missing has been found

Finn Lydon was was located last evening

Dr. Albert de Villiers, Chief Medical Health Officer for the Interior Health Authority. (Contributed)
‘People need to start listening’: IH top doc combats COVID-19 misconceptions

Dr. Albert de Villiers says light at the end of the tunnel will grow in step with people’s adherence to PHO guidance

(File)
One death and 82 new cases of COVID-19 in Interior Health

1,981 total cases, 609 are active and those individuals are on isolation

Youth Climate Corps members April Gariepy, Summer Monkman and Linn Murray at work in West Arm Provincial Park, fall 2020. Photo: Submitted
Youth Climate Corps members April Gariepy, Summer Monkman and Linn Murray at work in West Arm Provincial Park. fall 2020. Photo submitted
VIDEO: Kootenay youth climate group works to protect Nelson’s water supply

Youth Climate Corps members spent five weeks thinning forest in West Arm Park

Boundary Community Food Bank President Mike Wakelin thanked Grand Forks’ first-responders and city employees who donated food last week. Photo: Laurie Tritschler
Boundary Food Bank see recent uptick in clients after CERB runs out

President Mike Wakelin said demand plummeted while the benefit was available to working Canadians

Melissa David, of Parachutes for Pets and her dogs Hudson and Charlie are trying to raise money for a homeless shelter that will allow pets and are seen in Calgary, Alta., Thursday, Feb. 6, 2020.THE CANADIAN PRESS/Jeff McIntosh
‘My only wish:’ Children asking pet charity to help their furry friends at Christmas

Parachutes for Pets says it has received 14 letters from children in the last week t

Melissa Velden and her chef-husband Chris Velden, stand in their dining room at the Flying Apron Inn and Cookery in Summerville, N.S. on Friday, Nov. 20, 2020. The couple is hosting holiday parties with appropriate distancing and other COVID-19 health protocols in place at their restaurant. THE CANADIAN PRESS/Andrew Vaughan
Celebrities, Santa and Zoom part of office holiday parties being held amid COVID-19

Many will send tokens of appreciation to workers or offer time off or cash

Richard Reeves examines a painted film strip in his home studio. Photo: Aaron Hemens
PHOTOS: Pandemic inspires creativity for Creston animator Richard Reeves

For more than 30 years, Richard Reeves has been creating abstract animated short-films by drawing and painting images onto strips of film.

Good Samaritan Mountainview Village located at 1540 KLO Road in Kelowna. (Good Samaritan Society)
First long-term care resident dies from COVID-19 in Interior Health

Man in his 80s dies following virus outbreak at Mountainview Village

A demonstrator wears representations of sea lice outside the Fisheries and Oceans Canada offices in downtown Vancouver Sept. 24, demanding more action on the Cohen Commission recommendations to protect wild Fraser River sockeye. (Quinn Bender photo)
First Nations renew call to revoke salmon farm licences

Leadership council implores use of precautionary principle in Discovery Islands

Ten-month-old Aidan Deschamps poses for a photo with his parents Amanda Sully and Adam Deschamps in this undated handout photo. Ten-month-old Aidan Deschamps was the first baby in Canada to be diagnosed with spinal muscular atrophy through Ontario’s newborn screening program. The test was added to the program six days before he was born. THE CANADIAN PRESS/HO, Children’s Hospital Eastern Ontario *MANDATORY CREDIT*
First newborn tested for spinal muscular atrophy in Canada hits new milestones

‘If Aidan had been born any earlier or anywhere else our story would be quite different’

(Pixabay)
Canadians’ mental health has deteriorated with the second wave, study finds

Increased substance use one of the ways people are coping

Most Read