Credit Canada

Dollar At 30-Year High As Employment Growth Nearly Doubles Forecast

Since Camille Wollaston graduated from university, she has been busy paying off thousands of dollars in debt, the result of student loans, cellphone bills, rent and other costs.

Now with a hike in the Bank of Canada's key rate expected next week, the Toronto registered nurse and single mother worries things could get more difficult.

News yesterday of nearly 35,000 new jobs created in June sent the Canadian dollar flying to a 30-year-high. The dollar finished at 95.33 U.S. cents, up sharply from 94.63 U.S. cents the day before. The jobless rate stayed at a 33-year low of 6.1 per cent.

The news also made it almost a certainty that the Bank of Canada will increase its benchmark interest rate next week. Many analysts now project the bank's overnight lending rate will rise by a quarter-point to 4.5 per cent. That could lead to increased rates for consumer debt, such as lines of credit and mortgages.

"It's hard," said Wollaston, who is planning to buy a home. "When you finish school, college or university, you have loans to pay. While you are trying to pay off loans, you are trying to live your life, and then when you think you can afford a house, the interest rates are going up. That is another thing added on."

For Brampton resident Rachel Assad, the prospect of a higher interest rate is troublesome, particularly when she is already trying to pay down her debt. The 27-year-old teacher says she has found herself pushed into a corner because of the thousands of dollars she still owes.

"The interest just kills us," Assad says.

"It's ridiculous. Someone in my position wants to put a down payment on a home, it will make it 10 times more difficult for me."

As a society, Canadians have become more vulnerable to the risk of high interest rates, said Benjamin Tal, an economist with CIBC World Markets. He said the effect on consumers would depend on "how significant and how deep" the rise in interest rates will be.

"If for some reason interest rates go up significantly, more than 100 to 150 basis points, then we will start to see more significant damage and all kinds of cracks in what seems to be a solid position," Tal said.

"If we continue to carry debt at this level, I think we become vulnerable to not only high interest rates but also to other (events), like economic recession," said Tal.

However, he was quick to say he predicted a moderate increase next week.

"Another factor to consider is that most of the inflation in Canada is coming from the West," he wrote. "By raising rates too much, the bank is risking taking Ontario into a recession."

But still, the slightest increase can cause consequences for Canadians who are in precarious financial positions with little or no room to manoeuvre, said Laurie Campbell, executive director of Credit Canada, a credit-counselling organization.

"The problems with Canadians today is they are so highly indebted and most of it is credit cards," she said. "And anything like this, even though it is a small percentage, it could impact those who are on the border significantly because they don't have any emergency room or leverage to handle a rate increase."

Home buyers are among the main groups affected, said Victor Fong, a trustee in bankruptcy with Fong and Partners Inc.

"I think a lot of people who initially buy homes, they get into the housing market and are attracted to these variable rate mortgages," Fong said. "They are gambling interest rates will stay the same or go down, but when interest rates go up, the mortgage payments increase, which leaves less money ... from their income to finance their credit card debts and so forth."

But still, the estimates from many economists yesterday remained very conservative.

"The bank has moved in quarter-point increments - I don't see any urgency for them to break out of that pattern," said Douglas Porter, the deputy chief economist with BMO Nesbitt Burns.

"If they went any more than that, it would send the currency flying at this point." That is why he is predicting a quarter-point increase next week.

Porter says near record-high oil prices and pressure on the American currency are contributing to the loonie's rise.

"The star of the show this year and certainly this week has been the Canadian dollar," Porter said. "In the currency world, it has one of the strongest currencies globally."

"If financial markets needed one final spike driven into the ground to cement expectations that the bank will hike by 25 basis points on Tuesday, (yesterday's) employment report did the trick," said Beata Caranci, director of economic forecasting for TD.

As for job creation, Quebec led the way with 22,000 new full-time jobs created in June. Alberta followed close behind with 12,000 new positions while Ontario lagged behind with the creation of about 5,700 jobs. The latter's sluggish performance is due to strong energy prices, the high Canadian dollar and weaknesses with the big auto producers, Porter said.

* "Reproduced with permission - Torstar Syndication Services"