Interest Rate Hike Likely in the Fall: BMO

It seems that everyone is throwing their hat into the interest rate prediction ring these days.

BMO has issued a new report on the expectations for interest rates in the near future, drawing fuel from all the recent economic data suggesting that the Canadian economy is poised to grow, and has great potential- even to outperform analyst expectations.

 Based on this, they speculate that rate hikes will indeed resume by October of this year.

"In its latest policy announcement on May 31, the Bank of Canada said that monetary stimulus would have to be ‘eventually withdrawn'. However, this was not a signal of imminent rate hikes and a return to historical ‘neutral' levels," said Michael Gregory, Senior Economist, BMO Capital Markets. "Governor Carney has indicated that the Canadian economy still faces ‘considerable headwinds', namely a weak U.S. economy and strong Canadian dollar. Rates will surely rise, but by less than what past cycles would dictate.

"After a follow-up increase in December, the continued strength of the Canadian dollar will likely elicit another policy pause, one that will probably persist until the Fed is much closer to hiking rates," noted Mr. Gregory. "This will leave the Bank's benchmark rate at 2.5 per cent by the end of 2012. This ‘new neutral' is around half the historic norm, mostly owing to the super-strong loonie."

BMO suggests as well, that these rate hikes will possibly be the anchor to cool overheating markets in Vancouver and Toronto.

This also underscores a theme that has been stated and re-stated amongst politicians and industry leaders alike over the last several months to Canadian borrowers: Don't bite off more than you can chew.

Expecting that these rate hikes are in the future, the debt-holding public is encouraged to stress-test their debt loads at higher rates.

"We've been urging Canadians for some time now to prepare for interest rates to climb eventually; one way for home buyers to do this is to base their home financing budget on a higher interest rate to provide a cushion in the event of interest rate hikes," said Katie Archdekin, Head of Mortgage Products, BMO Bank of Montreal. "Our recent survey data shows that the majority of homeowners are confident they will be able to sustain their mortgage payments if interest rates rise, which is a good sign that the message is hitting home," said Ms. Archdekin.