The Bank of Canada governor Stephen Poloz has yet to change the key interest rate since he started his role in June of 2013. At that time he inherited the overnight rate of 1% set by his predecessor Mark Carney.
With Canada’s economy showing signs of recovery, an improving U.S. economy and a pickup in Canadian exports, there is the question of whether 2015 will be the year the central bank increases the key interest rate.
If the bank’s overnight rate does rise, Canadian businesses will see their borrowing rates rise. Consumers with car loans and mortgages will be in the same boat. A professor at the Sprott School of Business at Ottawa’s Carleton University, Ian Lee, predicts businesses will feel the sting of higher rates right away, but he expects the effect on households to be much more muted due to fixed rates for loans and mortgages.
Bill Robson, the president of the C.D. Howe Institute think-tank doesn’t anticipate major rate increases in the near future. He expects the bank to nudge the rate to 1.25 per cent and then, perhaps, to 1.5 per cent six months later.
The Bank of Canada said in late December that the country had showed signs of a “broadening recovery” and that the output gap appeared to be smaller than it had projected just six weeks earlier. The output gap represents the divide between where the economy stands at a given time and where it would be when performing at its full potential. The Organization for Economic Co-operation and Development recently predicted the Bank of Canada would start pushing the rate up in late May due to advancing inflation, a key driver of interest rates. There are many predictions on the table yet it remains unclear what 2015 will hold for the central bank’s key interest rate.
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