Canadians should brace themselves for higher borrowing costs earlier than expected, economists warn


Canadians may need to brace themselves for higher borrowing costs earlier than expected.

That’s the message from economists at some of Canada’s largest banks after a report Friday showed gross domestic product grew more quickly than anticipated at the end of 2020, even amid a new wave of lockdowns. The numbers are calling into question whether a first-quarter contraction will materialize after all, and leading analysts to suggest growth in 2021 could be stronger than earlier believed.

They also threaten to put pressure on the Bank of Canada to reconsider how quickly it expects to withdraw stimulus.

The central bank has pledged to keep interest rates near zero until slack is fully absorbed, something it doesn’t see happening until 2023. But stronger growth could lead to an economy running at full capacity earlier than the two-year timeline, which may prompt policy makers to bring rate hike expectations forward.

The data carry “potentially strong policy implications for the Bank of Canada that is increasingly looking as if it over-committed itself to keeping rates on hold until 2023,” Derek Holt, an economist at Bank of Nova Scotia, said in a report to investors. “The prudent thing to advise heavily indebted Canadians is to plan their finances around rate hikes commencing considerably sooner.”

The bank has held its overnight interest rate at a record low 0.25 per cent since March to spur lending in the economy. Interest rates that commercial banks give to their prime customers are typically just over 2 percentage points above the policy rate.

To stoke demand for credit, Macklem has also committed to not raising interest rates until damage to the economy from the pandemic is fully repaired. With the recovery stalling over the winter because of the lockdowns, that wasn’t expected to happen for another two years.

But the Canadian economy appears to be coping much better with the second wave of COVID-19 than the central bank expected as recently as this month.