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

Just Posted

Ancient microbes discovered off the Juan de Fuca Ridge potentially offers glimpse into alien life

The marine bacteria is dependent on hydrogen, a compound present almost everywhere

Volunteers needed for annual Mother’s Day walk

Breast Cancer Society of Canada hosts annual Mother’s Day event

Saanich rental project wins silver by going ‘green’

The Verve rental housing project stands at the corner of Boleskine Road and Whittier Avenue

Sidney Lions dish $4,000 to help build on growing trishaw bike charity

Cycling Without Age Society draws attention as far off as Washington

420 celebrations turn over new leaf at B.C. legislature

Cannabis is legal for the first time in the 21-year existence of the 420 event in Victoria

WATCH: Movie star and PACE alum Calum Worthy talks musical theatre and his career

“American Vandal” and “Austin and Ally” actor has been returning to the program for over 20 years

POLL: How often does your family use BC Ferries?

Navigating the lineups for BC Ferries is a way of life for… Continue reading

Crime Stoppers most wanted for Greater Victoria for the week of April 16

Greater Victoria Crime Stoppers is seeking the public’s help in locating the… Continue reading

Global Affairs warns Canadians in Sri Lanka there could be more attacks

A series of bomb blasts killed at least 207 people and injured hundreds more

Waste not: Kootenay brewery leftovers feed the local food chain

Spent grains from the Trail Beer Refinery are donated to local farmers and growers, none go to waste

Deck collapses in Langley during celebration, 35 people injured

Emergency responders rushed to the Langley home

B.C. mom wages battle to get back four kids taken from her in Egypt

Sara Lessing of Mission has help from Abbotsford law firm

VIDEO: Fire guts Peachland home

Crews are still on scene pumping water onto the blaze in the Okanagan neighbourhood

$6K raised in one day’s time for family of woman gunned down in Penticton

GoFundMe launched for family of Darlene Knippelberg, to pay for funeral costs and other expenses

Most Read