The trajectory of the Canadian economy depends on interest rates. With a housing market that looks more and more like a bubble and record levels of household debt, a sharp rise in the cost of borrowing would cause immediate and lasting damage to economic growth.
What are the odds of an interest-rate-led financial cataclysm in 2014? Any attempt to answer this question depends on the reality that Canada is a “yield-taking” country with interest rates largely determined by the U.S. bond market. Therefore, prognosticators must answer two questions: What will U.S. Treasuries do? And how will the Bank of Canada react?