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Briefing highlights

  • Interest rates: You, me and Alice
  • Bank of Canada boosts benchmark rate
  • Markets at a glance
  • Sporting Life, Golf Town to merge

Bank of Canada boosts key rate

The Bank of Canada raised its benchmark rate again today, and sent a definitive message to markets that its ready for more.

As The Globe and Mail’s Barrie McKenna reports, governor Stephen Poloz, senior deputy Carolyn Wilkins and their colleagues raised the overnight rate by one-quarter of a percentage point to 1.75 per cent.

At the same time, and in a key move, they dropped their previous reference to taking a “gradual” approach to further increases, sending the Canadian dollar up in the process as higher rates are loonie-friendly.

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It also tweaked its economic growth prospects and cited the easing of trade tensions with the United States.

“But the tone was more hawkish than we expected, dropping the reference to ‘gradual’ for hikes ahead (which markets will see as leaving the door open for two in a row, meaning a hike in December), and asserting that rates will have to keep climbing to ‘neutral,’ which the Bank has estimated as near 3 per cent,” said CIBC World Markets chief economist Avery Shenfeld.

“That’s more hawkish than we see as the likely outcome, as we’re not as optimistic on the economy’s ability to weather that dose of tightening, and note that the bank will still ‘take into account how the economy is adjusting.’”

Which is where you and I and Alice may play a role as to what comes next.

The central bank said it’s still fretting over high levels of household debt, and the impact of rate increases as consumer borrowing costs rise from the ultra low levels of the financial crisis and later oil shock. Remember, we owe $1.69 for every dollar of disposable income.

Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen Poloz

PATRICK DOYLE/The Canadian Press

Which means Mr. Poloz and Ms. Wilkins are watching you, me and Alice closely. Because we owe $1.69 for each dollar of disposable income.

Alice is a perfect example.

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Profiled about a year ago by Dianne Maley in our Financial Facelift feature, she and her husband own an expensive home in the Vancouver area, are both self-employed in their fifties, are educating three kids, and were, at the time, looking at renewing their mortgage at a higher rate.

And, importantly, her husband carrying that mortgage into retirement as he’s the older of the two.

Alice and her husband

You can read about them here in our feature, which doesn’t use real names.

In its accompanying monetary policy report, the central bank noted that Canadians are taming their borrowing habits in the wake of tighter mortgage-qualification rules and other measures meant to cool off inflated housing markets, particularly in Vancouver and Toronto.

“Household credit growth has slowed, and the share of new mortgages with high loan-to-income ratios has fallen,” the report said.

“The ratio of household debt to income has levelled off and is anticipated to edge down.”

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Things are definitely improving. New low-ratio mortgages fell in the second quarter by about 15 per cent from a year earlier. And, importantly, the decline was “more pronounced” among those really vulnerable borrowers whose loan-to-income ratio topped 450 per cent.

And here’s the warning to you, me and Alice: “While policy measures have been effective in reducing household vulnerabilities, the sheer size of the outstanding stock of debt means that the vulnerability associated with elevated household indebtedness will persist for some time.”

Which is why analysts attach caveats to how fast and how high the central bank will go, and why our debts may play a role.

“The bank’s communication today reaffirms our view that three additional rate hikes are likely next year, with the first coming in January,” said Toronto-Dominion Bank senior economist Brian DePratto.

But that will hinge on how debt-burdened consumers respond.

“It is crucial that the moderation of consumer spending remain just that – a moderation, rather than a pause or outright contraction,” Mr. DePratto said.

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“Should rising rates begin to have an outsized (and growth-sapping) impact on spending/credit growth, we’d expect at least a pause (beyond the spring 2019 break we’ve already penciled in) to reevaluate the path.”

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Markets at a glance

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Sporting Life, Golf Town to merge

No pun intended here, but Sporting Life and Golf Town are linking up.

The two companies today announced a merger that will see them continue to run separately, with their own brands, but “they will jointly invest in key people, technology and supply chain to enhance future profitable growth and synergies.”

Sporting Life has 11 shops in Ontario, Alberta and Quebec, with plans for another in Vancouver next year.

Golf Town, in turn, has 47 stores. Both are owned by Fairfax Financial Holdings.

“Sporting Life experiences its strongest sales in the winter months, while Golf Town experiences its strongest sales in the summer months,” Sporting Life chief executive officer David Russell. “We believe this to be a natural ‘hedge’ allowing both companies strong profitable performance throughout the year.”

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