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Is Canada's Rate Hike A Cautionary Tale For Other Central Banks To Learn From?

Jayson Derrick

Canada's Prime Minister Justin Trudeau promised middle class Canadians and those working hard to move up the economic ladder "sunny ways" during the 2015 election campaign. But a recent move by the Bank of Canada to boost interest rates for the first time in years may serve as a cautionary tale for central banks across the world.

Canada's central bank raised its key interest rate for the first time in seven years to 0.75 percent on July 12. All this means is that interest costs will move higher and every day expenses that are already out of reach will be even more expensive, Bloomberg's Josh Wingrove argued.

The timing of the interest rate hike is also questionable given the Canadian government's own admission that families are "taking on more debt to make ends meet," Wingrove said. Granted, the prime minister may not welcome the rate increase, but his expansionist fiscal policies are likely to force the central bank to oversee additional rate hikes to contain inflation which will come as a result of stronger growth.

Highly indebted households, regardless if in Canada, the U.S., Europe or elsewhere are always the most impacted from any rate-hike increase, Wingrove emphasized. After all, every incremental dollar that families owe in interest payments is one dollar less that is available for savings.

"This could mean that the consequences for highly-leveraged households would be amplified," Stephen Gordon, an economist at Laval University in Quebec City told Bloomberg. "I don't think we're anywhere close to a narrative in which middle-class households are going bankrupt because Justin Trudeau's government is spending too much. But it's something to keep in mind over the next couple of years."

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