Prepare clients for interest rate hikes

The Canadian economy has become more sensitive to interest rate fluctuations.

That’s because consumers are carrying record levels of debt, which means they’ll be more deeply impacted by future rate hikes, says Benjamin Tal, deputy chief economist of CIBC World Markets. The average household debt-to-income level was 163.7% in 2013, according Statistics Canada.

The Bank of Canada will likely start raising interest rates in 2015, he adds, though he also predicts the bank will follow the Federal Reserve’s lead on when to push for increases. And this will depend on how quickly new chair Janet Yellen implements quantitative easing.

“I believe [the Fed] will start [tapering] in the first half of the year and will end the quantitative easing by mid- to late 2014,” says Tal. “Short-term interest rates likely won’t start rising before early 2015 in both countries.”

Read: Canada constrained until Yellen moves

When rates rises do occur, Canada will be hit harder than the U.S., he adds. Our skyrocketing debt levels suggest monetary policy is extremely effective here, so “the surprise will be how little it will take in terms of higher interest rates to slow down the economy, in general, and [also] the consumer.”

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• How to cope with inflation, deflation and stagflation
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Tal expects monetary policy changes over the next few years will impact both stock and bond markets, but says the stock market will come out on top in 2014. Its growth will “reflect higher and long-term interest rates [and the] anticipation of some interest in short-term rates.”

The improving global economy will also boost markets. And though future rate increase may drag on the Canadian economy, Tal remains optimistic about our nation’s prospects; he says the energy sector in particular will help keep us afloat.

Read:

• Equities to outshine gold in 2014
• What will 2014 bring?

“The shale oil revolution [in the U.S.] is introducing a sense of urgency when it comes to developments in Alberta and in Western Canada,” and this renewed drive could help boost our infrastructure, pipeline and rail activity.

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