Calling all variable rate mortgage holders! Expect your bank’s prime rate to go up this summer. The question now is: by how much?

Kiyoko Fujimura

Buzzbuzzhome Corp.
March 19, 2010

Central banks are a strange thing. They’re kind of like a parent for a country of children. While us kids are always wanting more, more, more from the economy, the Bank of Canada keeps us in check by raising rates and making it harder for the economy to move forward.

Why would they want that? To keep inflation down. What us kids don’t realize, is that if the economy continues to drive forward, prices will increase far too quickly and international investor confidence will be destroyed (since as prices increase it erodes the value of the Canadian dollar and, accordingly, the value of their investments as well).

Okay, so the economy’s gone a bit crazy lately. GDP in the last quarter of 2009 was higher than expected and housing values in Canada have increased so much that the murmur of a housing bubble has recently turned into a roar.

BUT, it’s still unclear whether or not we’re out of the woods with regard to the jobless rate. Read the Toronto Star’s article about the possibility of a jobless recovery here.

So raising rates could make the economy worse, but could help international confidence in Canada. Also, importantly, raising rates could take some steam out of the housing market to subside worries about the housing market.

Central bank Governor Mark Carney pledged last April to keep borrowing costs at record-low levels through the middle of this year depending on the outlook for inflation. Increasingly, economists are saying Mr. Carney will start tightening in July at the latest and possibly earlier. The Globe and Mail

Rate hikes could be catastrophic at worst for homeowners and cause some tighter budgets at best. The introduction of the HST just throws in another wildcard for home prices and consumer spending that the Bank of Canada has to weigh.

The market has already weighed in and is betting that rates will go up. Read more about the market’s reaction in The Globe and Mail here.

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