Higher Borrowing Costs = Big Risk For Bank of Canada

My friends at Capital Economics, not long ago, suggested that the BOC would have to cut rates in the fall as the housing market in Canada started to crumble. 

Yesterday after the BOC announced a rate increase of 1/4%, they suggested that this was a gamble that may come back to haunt them: "The Bank of Canada's decision to begin raising rates is a gamble that might have to be reversed before long. With the housing bubble already showing signs of bursting and household debt at extremely high levels, higher borrowing costs will dampen economic growth and pushing core inflation even further below target."

It is definitely a central bank play to further corral the housing market in Canada and from my experience (as a currency and bond trader) when a central bank senses that they can add more impact (housing market already showing signs of slowdown from other government initiatives) it is strategic.

However, it does take them away from their mandate of maintaining price stability (core inflation is at 1.3% and the target is at 2%), although they can talk their way around it with metaphors about pumping the brakes well in advance of the red light. 

The big risk is that the light ahead isn't red. So you are slowing down when it is not warranted.

The folks at Capital Economics suggest that central banks around the world are struggling with the inflation conundrum and that "we have some serious doubts about the Bank of Canada's forecast that inflation will rebound".

If heavily indebted households will be unable to absorb the increase in debt servicing costs, they will pare back their discretionary consumption and this will negatively impact the economy.

Declining home prices will too.

Time to check your Wealth Forecasts if you have cash flow concerns. If you don't have a Wealth Forecast best get on it. Everybody needs a plan.