Canada raises interest rate for first time in 7 years

By Barry Ellsworth

TRENTON, Ont. (AA) – The federal body governing banking in Canada on Wednesday raised the interest rate to 0.75 percent from 0.5 percent.

The rate increase is the first in seven years and will result in higher mortgage rates for borrowers and an increase in home equity loans. The latter are popular in Canada, where people receive a lower interest rate while using their homes as collateral.

The Bank of Canada said the increase was justified because economic conditions have improved in Canada as a result of the low borrowing rates.

“Canada’s economy has been robust, fuelled by household spending,” the bank said in a statement. “Growth is broadening across industries and regions and therefore becoming more sustainable.”

The collapse in crude prices hurt production in Canada’s oil sands and cost the Canadian economy about CAN$60 billion annually, but the industry and the economy have adjusted.

“As the adjustment to lower oil prices is largely complete,” the bank said, “both the goods and services sectors are expanding”.

Interest rates were kept low since 2009 to help the economy recover from the global financial crisis.

But economists were concerned the low rates were fueling too much borrowing, which could lead to a financial crisis, Canadian media reported in May.

In the third quarter of 2015, Canadian households had the highest debt-to-income load among G7 countries, standing at 171 percent, according to Statistics Canada. That means for every CAN$100 of net income, households owed CAN$171.

Higher interest rates usually put the brakes on borrowing.

Canada has become the first country to follow the United States, where the Federal Reserve raised the rate to 1 percent from 0.75 in March.

Canada’s rate increase could affect other countries since it is generally a bellwether in global financial affairs.

In 2015, Canadian rate cuts were followed by other nations that accounted for almost half of global output, including China, Denmark, Sweden, Indonesia and Australia, according to media reported.