Interest rates may be headed up more quickly than you think. The Bank of Canada’s key overnight rate, which sets the tone for other interest rates throughout the economy, is now at a record low 0.25%. In little more than a year it could be as much as three percentage points higher, which would mean much increased lending rates for consumers.
If that strikes you as too much of a shock to the system, you’re not alone. Larry MacDonald, the excellent economics commentator, points to an interesting discrepancy between the latest pronouncement from the Monetary Policy Council of the C.D. Howe Institute and a C.D. Howe brief released just two days earlier.
Michael Parkin, the University of Western Ontario economics professor who wrote the brief, is in favour of abrupt action. He would like to see the overnight rate jump in 50-basis-point increments starting this summer. That would mean the rate would hit 3.25% in March 2011.
Parkin argues the increases are necessary to keep inflation under control. That may be so, but, among other things, such a rapid increase in rates could mean trouble for Canada’s red-hot housing market.
That may be why the monetary policy council is in favour of much more gentle increases. The median recommendation of the nine-member council calls for gradual hikes beginning this summer to bring the overnight rate to 2% by March 2011.
Freelance business journalist Ian McGugan blogs for the Financial Post.