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business briefing

Briefing highlights

  • What rate increases will mean
  • Hydro One: Just sayin’
  • Behind the scenes at Hydro One
  • Stocks, loonie at a glance
  • JPMorgan posts quarterly profit gain
  • Citigroup profit also rises

The impact of rate hikes

Here’s another way to look at the Bank of Canada’s interest-rate hikes over the last year: A $10-billion hit to incomes.

You can look at it another way, too: That’s equal to a 1-per-cent pay cut.

Those calculations from David Rosenberg, chief economist at Gluskin Sheff + Associates, came after the Bank of Canada raised its benchmark overnight rate again Wednesday, by one-quarter of a percentage point to 1.5 per cent.

That brought the cumulative rise in the key rate to a full percentage point over the past year, the central bank having cut the benchmark during the crude shock that whacked the oil patch.

And it promises to eat into consumer spending, which has helped buoy Canada’s economy and which is already suffering, as we all juggle our finances to pay the added costs of borrowing.

“The BoC has raised rates 100 basis points this past year, and the incremental debt service drain on the household sector will be more than $10-billion, or the equivalent of a 1-per-cent pay cut,” Mr. Rosenberg said in a report.

“In other words, just less than half of the BoC’s blended estimate of where wage growth actually is (+2.3 per cent) will be offset by higher interest payments!” he added.

“Nice, so long as you’re not long Canadian consumer discretionary stocks, that is.”

Here’s how Mr. Rosenberg and his team arrived at those calculations:

Based on Bank of Canada numbers, about half of Canadian mortgages reset over the next year. Total household debt stands at $2.1-trillion, about 75 cent of that in mortgage borrowing.

The Gluskin Sheff team thus assumed about half of household debt, or $1.05-trillion, resets this year. Multiply that by 1 per cent to represent the rate hikes and, voilà, you’re at more than $10-billion.

Here’s how you get the “pay cut” part of the equation: Total disposable income in Canada is about $1.2-trillion, so the rise in the cost of servicing our debts is about 1 per cent as a proportion of income.

(If you really want to make your head spin, consider that, as Mr. Rosenberg noted, the central bank estimated Wednesday that “underlying wage growth is running at about 2.3 per cent, slower than would be expected in a labour market with no slack.” It projected, too that annual inflation will run up to about 2.5 per cent, then ease to 2 per cent in the second half of next year.)

Here’s a view of the mortgage reset issue from the Bank of Canada’s monetary policy report, released Wednesday at the same time as its rate decision:

Open this photo in gallery:

Source: Bank of Canada

The solid circles here are actual mortgage debt-service ratios at origination, according to the central bank, while the open circles are estimates before renewal and squares are estimates at renewal.

The central bank looked at mortgage debt-service ratios, or the ratio of annual payments to income, calculated for rates that are one and two percentage points higher in 2019 and 2020, respectively. It also assumes 11-per-cent growth in incomes over each five years.

The Bank of Canada has been monitoring the impact of its rate hikes on the economy. Remember, the household debt burden has recently eased, but is still high, and the central bank considers the increase in debt service ratios “very modest” compared to origination dates.

Open this photo in gallery:

Bank of Canada governor Stephen PolozJustin Tang/The Canadian Press

“Keep in mind that many households have had some income growth during these past five years, and these households may have growth accustomed to higher income levels,” Bank of Canada governor Stephen Poloz said Wednesday.

“They may face an adjustment as their debt-service ratio rises once again, with consequences for their consumption spending,” he added.

“Of course, this issue is most important for highly indebted households. We also know that the jump in payments will be greatest for those who took out mortgages when interest rates were at their lowest levels, in 2015 and 2016, so the mortgage renewal process is likely to weigh on the economy more in 2020 and 2021.”

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Hydro One: Just sayin’

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Stocks, loonie at a glance

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JPMorgan profit up

JPMorgan Chase and Co. kicked off U.S. bank earnings today with an 18-per-cent gain in profit, topping estimates.

Second-quarter profit rose to US$8.3-billion or $2.29 a share, the banking giant said, as revenue climbed 6 per cent to US$28.4-billion and its credit loss provisions were flat at US$1.2-billion.

“We see good global economic growth, particularly in the U.S., where consumer and business sentiment is high,” chief executive officer Jamie Dimon said in releasing the numbers, adding that global competition is on the rise.

“The healthy U.S. consumer drove double-digit growth in client investment assets, card sales and merchant processing volumes,” he added.

Return on equity was 14 per cent.

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