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Is Canada Ready For Poloz?

Jul. 11, 2017 3:16 PM ETEWC, FXC, QCAN, FCAN, HEWC


  • The market has priced in the rate hike according to CAD/USD.
  • Too low for too long?
  • Canada's low-rate environment has let consumers indulge above their means.

On July 12, The Bank of Canada (BOC) will announce the decision regarding Canada's interest rates. The low-rate environment in Canada was utilized to offset the decreasing price of oil, helping decrease the value of the CAD and encouraging foreign investment. Although, the intentions of the low rates go back to basic economic theory and when a country decreases interest rates, the value of the home currency decreases relative to other countries making Canadian goods and "equities" cheaper for foreigners. The BOC had used these measures according to a macroeconomic outlook, but this was taken advantage of by consumers and this is where the problem exists, creating hesitation for Central Banker Stephen Poloz and he is, no fool.

Consumers took advantage of Canada's low-rate environment, and let human nature take its course. As low rates allow cheap borrowing, banks receive an overnight rate of 0.50% inducing cheap borrowing on a commercial and retail level. The problem lies when most of this debt is used by consumers purchasing unproductive goods and services rather than businesses using the cheap money to invest into the economy to create jobs and increase Canada's productivity base. Consumers have used their capacity to borrow to purchase big ticket items. The recent record in auto sales (2016-1.95 million) (Canadian and U.S. auto sales) and the unsustainable boom in housing prices are a few signs of consumers making large unsustainable purchases, making consumer indebtedness now Poloz's biggest fear. You could go on to analyze the aspects of the housing and car markets to extract exact numbers or data, but this should be pretty intuitive to any financially minded individual.

This prolonged low-rate environment has created problems as consumers overextended themselves with assets that could potentially render negative equity, as debt based asset purchases can be more volatile as they

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