Canada’s Increased Interest Rates Would Hit the Young the Hardest

Young people and mid-income earning households would be the highest hit by the higher interest rates introduced by the Bank of Canada, a new Federal analysis states.The analysis examined issues like income, age and region in order to determine which households would be most hit by the Bank’s hike in interest rates.

The document addressed questions such as: Who are these stretched households? And it came to the conclusion that these would consist of middle-income earners, Canadians under 45 years old, mortgage holders, the self-employed, and those in Ontario and British Columbia, said a report on theglobeandmail

“The expected increase in interest rates over the next few years will have various impacts on Canadian households, including an increase in the cost of servicing debt,” the document said. “Naturally, households with high debt levels would see the largest increases.”

These younger households had already rising debt rates mostly due to mortgage. Older households naturally would have lower debts because most of them have paid of their mortgages, the article explained. It’s worth noting that the article was written based on data from research made in 2012. Questions havebeen raised as to why the use of such outdated data but these questions were not answered in the report. It can be recalled that recently, the central bank has once again raised its interest rates, bringing it to a 1.5%.

Central Bank governor Stephen Poloz has commented that more gradual rate increases should be expected over time as the country’s economy was strong enough to take it.

According to a report on Theglobeandmail.com. “Central bank officials have estimated the bank’s normal or neutral rate – the preferred level when the economy is operating at full capacity and inflation is on target – is between 2.5 per cent 3.5 per cent. With this neutral rate in mind, analysts expect Poloz to introduce several more quarter-point hikes and many believe the next one could arrive before the end of 2018.”

Reasons for the continuous rise in interest rates are not farfetched;the economy has been performing well, and the central bank believes these interest rates are still historically low. According to a report on the Financial Post, “the most obvious sign of that progress is an unemployment rate of 5.8 per cent, the lowest in at least four decades, and the creation of almost 300,000 jobs over the past year. Those people now are making money, shopping, and helping their employers keep up with increased demand. The Bank of Canada did the math and determined that all those new economic actors have increased the economy’s ability to generate goods and services without stoking inflation.”

Finance Minister Bill Morneau said described the economy as “firing on all cylinders”. This statement might be right, judging by the central banks assessment of the economy. However, there still remains a need to consider the fact that increasing interest rates are falling most of the young and mid-income earners, and find a way to mitigate the effect on these costs on this class.