The commonwealth countries are all facing a property bubble (Canada, New Zealand, Australia, etc). The household debt levels and property prices didn't taper off nearly as much following the 2008 US housing crisis and has pretty much continued unabated: <a href="http://www.huffingtonpost.ca/stephen-punwasi/real-estate-bubble-commonwealth_b_12385078.html" rel="nofollow">http://www.huffingtonpost.ca/stephen-punwasi/real-estate-bub...</a><p>Which is fascinating to consider that the Bank of Canada, et al, have let this happen for so long and are only reacting now...<p>By artificially keeping rates near 0% the idea was to 'stimulate' the economy by making capital freely available, so for example, banks can more easily loan money to businesses generating long term economic growth and add new jobs. But the side effect has been that retail banks were incentivized to hand out cheap mortgages and the public was incentivized to speculate on the 'hot' property market.<p>If this bubble doesn't deflate smoothly this will be yet another very expensive side effect of mainstream monetarist policy.
For those not following Canada's economy. Two weeks ago no one was sure if they'd hike the rate again, and no one thought they'd do it so quickly (though it seemed likely they'd do it ~oct/nov).<p>But, Canada posted exceptionally strong growth numbers (4.5%) at the end of August, which kind of made this very likely.<p>Also, the government just sold bonds that mature in 2064 (at 2.2%) and has indicated that it might issue more "ultra-long bonds" in the coming months.<p>All this to say, money's going to stop being cheap.
For those like me who didn't know what the over night rate is:
"The overnight rate is the interest rate at which major financial institutions borrow and lend one-day (or `overnight`) funds among themselves; the Bank sets a target level for that rate."<p><a href="http://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/" rel="nofollow">http://www.bankofcanada.ca/core-functions/monetary-policy/ke...</a>
Informational note: The notion of fixed rate mortgages does <i>not</i> exist in Canada. You can lock in for about 5 years, but otherwise your mortgage rate floats with prime.<p>If prime rates rise, borrowers can be on the hook for large amounts of defaults as incomes fail to keep up with higher payments.<p>(canadian housing market exhibits higher sensitivity to interest rates)
Relatedly, the Toronto housing market that kept shooting up even as the US hit its 2008 housing crisis now have hit their top:
<a href="https://www.bloomberg.com/news/articles/2017-09-06/toronto-housing-market-continues-slowdown-with-august-price-drop" rel="nofollow">https://www.bloomberg.com/news/articles/2017-09-06/toronto-h...</a>
This will be very interesting to watch. The Toronto real estate market has already started to correct. Prices are down 20-30% seconds nice earlier this summer. A ton of people eager to buy "before prices go even higher" are getting creamed.<p>Interest rates going up will only make this worse.<p>Hold on tight!!
Quick summary:<p>Overnight rate directly affects the prime rate, the rate at which commercial banks loan to their least risky customers. In the US, prime rate hovers 3% above overnight rate (federal funds rate). You can see that relationship here: <a href="https://fred.stlouisfed.org/graph/fredgraph.png?g=eY9Y" rel="nofollow">https://fred.stlouisfed.org/graph/fredgraph.png?g=eY9Y</a><p>In basic economic theory, when interest rates go up, the economy slows down. Higher interest rates encourage saving/purchasing safe assets, and make lending/investing in risky assets or new business ventures more expensive. Banks generally make less loans that fuel direct economic activity when interest rates are higher.<p>Context/So What:<p>Canada's economy showed strong signs of growth and low unemployment, so the central bank decided to bump up the interest rate a bit while the data supported the decision to "cool off" the economy.<p>OK, so commercial loan interest rates will rise 0.25%. Not a huge deal for majority of the economy.<p>More importantly, the central bank is slowly gaining back the overnight rate as a tool for monetary policy. Many central banks are unwilling to drop the overnight rate below 0%, effectively taxing banks for the reserves they are usually mandated to hold with the central bank.*<p>If the Bank of Canada can continue to bump the overnight rate up to traditional 4-5% level, it can then cut the rate again to spur economic activity in the case of a downturn. The closer the overnight rate is to 0%, the less effective the rate is as a monetary policy tool.<p>Personally I believe it will be a long time before we see 4-5% overnight rates again, but overall this is a reaction to good economic news. It happened before investors expected, so the markets are buzzing about it a bit, even though the small bump will probably not have a large impact on Canada's economy.<p>*BoC actually has no reserve requirements: <a href="http://www.bankofcanada.ca/1997/04/working-paper-1997-8/" rel="nofollow">http://www.bankofcanada.ca/1997/04/working-paper-1997-8/</a>
I'm still learning all the tendencies of these macroeconomic trends...<p>So, this should mean mortgage loan rates, savings account interest rates, and inflation are all now on an upward trend. Right?<p>And thus housing prices should begin to curb, since the cost of loans making buying houses more expensive and less appealing, thus lowering demand.<p>(I've already noticed increasing savings account rates and mortgage rates, so it definitely seems like this is an upward trend, though I haven't seen much curbing of housing prices yet)
<a href="http://www.ctvnews.ca/bank-of-canada-raises-overnight-rate-to-1-per-cent-1.3576893" rel="nofollow">http://www.ctvnews.ca/bank-of-canada-raises-overnight-rate-t...</a><p>> The move, which will likely be a surprise for some, came less than a week after the latest Statistics Canada numbers showed the economy expanded by an impressive 4.5 per cent in the second quarter.<p>> "Recent economic data have been stronger than expected, supporting the bank's view that growth in Canada is becoming more broadly-based and self-sustaining," the bank said.<p>> The rate increase means governor Stephen Poloz has now reversed the two cuts he introduced in 2015 to help the economy deal with the plunge in oil prices. The bank said Wednesday the increasingly robust economy shows it no longer needs as much stimulus.<p>> Others predicted the bank would refrain from moving the rate out of concern such a move would drive up an already strengthening Canadian dollar and pose a risk to exporters.<p>> In its statement, the bank also said headline and core inflation have seen slight increases since July, largely as expected. It noted, however, that upward pressure on wages and prices remain more subdued than historical trends would suggest, which has also been seen in other advanced economies.
The exchange rate between the USD and CAD jumped by over 1% at the announcement despite it being widely expected:<p><a href="https://www.bloomberg.com/quote/USDCAD:CUR" rel="nofollow">https://www.bloomberg.com/quote/USDCAD:CUR</a>