Canadian borrowers wait and wonder if rates will rise tomorrow: Don Pittis

For millions of Canadians, whether or not the Bank of Canada increases interest rates tomorrow isn't merelya financial page headline. It's a matter ofmoney out of their pockets.

July's single quarter-point rise, the first in seven years, was easy to set aside as a quirky exception.

But the notion of asecond increase within two months suddenly changes the game.

In the world of compound interest, especially for consumerswho have pushed borrowing to the limit, each quarter-point rise increases the pain exponentially.

Bigger payments

Not only would another quarter-pointincrease double the extra cash borrowers must scrape together to maketheir monthly payments, this time it is hard to ignore the writing on the wallthat we are watching a trend.

As we have reported, U.S. rate increases are ominous for Canadian borrowers. U.S. Fed chief Janet Yellen's repeated warningspassed on byCBC News were bound to have a long-term impact on the cost of borrowing in Canada.

But when the Bank of Canada moves, the effect is much quicker.

If you are one of the millions of Canadians who have a line of credit or a variable-rate mortgage where the interest rate is pegged to prime,the impact will be likely be immediate.

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Those with fixed-term mortgages, or things like car loans where the rate is set by contract to cover the entireborrowing term,havea pad. They have time to think about where to find the money to pay higher ratesonce they renegotiate their mortgage or buy a new car.

And a rate rise will affect the price of houses. Just as higher interest ratespush down the price of existing bonds, higher mortgage rates shouldhave a similar effect on houses.

'No way to avoid the math'

"Every single rise, yes, that will mean house prices are going to drop," says realty consultant Ross Kay from Burlington, Ont. "It's simple math. There's no way to avoid the math."

However, he says the rules imposed by theOffice of the Superintendent of Financial Institutions inanticipation ofa series of rate rises like the one that could continue this week, havealready had a bigger overall impact on the housing market.

This springOSFIrequired most first-time buyers to pass a stress test, suddenly forcing them to qualify for rates twopercentage points higher than those in the market. Kay says thatimpact on the cost of borrowing at the entry levelhas had consequences all the way through the market and may dwarfthe fallout of anotherquarter-point rise this week.

In theory, rising interest rates, whether they come now or later, will hit consumers at many levels. That's because the cost of borrowing will rise not just for consumers but for businesses, too.

However the slowing effect of rate risesis far from instant. Research has shownthe full effect of a ratehikeis not seen in the real economy for more than a year.

At the end of last week, itwas interesting to watch how the opinions of economists who analyze market expectations changed.

On Wednesday a poll of economists assembledby the financial wire services showed expectations of a rate rise were a fringe view.But after Thursday's startling Canadian quarterly growth figures, that began to change.

• GDP grew at 4.5% annual pace in 2nd quarter

By theclose of business before the Labour Dayweekend, currency traders were betting more than even odds that a rate rise was on the way.

In the poll of economists, those saying they expected the bank to raise rates by another quarter-point had also begun to increasewith credible voices including Avery Shenfeld at CIBC and Derek Holt at Scotiabank weighing in in favour.

But thereare good reasons why there are still doubters.

A risk or an opportunity?

Modern central bankers don't like to shock the markets with sudden and unexpected changes. While Bank of Canada governor Stephen Poloz always deflects point-blank questions over whether he will raise rates, he and his team do a lot of hinting.

As the poll of economists all of whom recognize the subtlesthints shows, that did not happen this time.

Another signal against a September rate rise is that Wednesday's Bank of Canada release is scheduled to be a written statement only.

Usually changes as dramatic as a rise in interest rates would come with a verbal explanation byPoloz and his deputy Carolyn Wilkins, including a public question and answer session with financial reportersto clarify and justify the move.

In that way, a rate rise this week would be extraordinary.

One reason for such a sudden and unexpected move would be if the bank decided the stunning 4.5 per cent growth rate announced last weekwas a clear sign of an overheating Canadian economy and the bank judged a delay of another month before raising rates would berisky.

Another possibility is that Poloz, convinced rate rises are necessary, has decided last week's extraordinary growth figure presents a window of opportunity. With signs of a surgingeconomy so fresh in everyone's minds,critics of a tightening rate policy will have little ammunition for saying Polozhas got it wrong.

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