The Bank of Canada’s interest rate hike announced Wednesday will have little, if any, immediate effect on the country’s new-vehicle industry, says the Canadian Automobile Dealers Association’s chief economist.
Canada’s central bank raised its benchmark interest rate to 0.75 per cent from 0.5 per cent, its first increase in nearly seven years, amid expectations of stronger economic growth this year.
Such a move is bound to increase the costs of mortgages, home equity lines of credit and other loans linked to the big banks’ prime rates, but Michael Hatch says auto dealers shouldn’t be concerned.
“Obviously, consumer financing is an important part of our business; 90 per cent of sales involve financing of some kind. But most loans are of the fixed rate variety, so most people won’t see a bump in the payment they’re making,” he told Automotive News Canada in an interview. “They might see an increase in the rates when they go shopping for a new vehicle, though.”
The rate hike is the first in seven years. In fact, the Bank of Canada actually cut interest rates by a quarter of a percentage point twice in 2015 to help the economy deal with a plunge in oil prices, but it said Wednesday that adjustment has been made.
“The very strong growth of the first quarter is expected to moderate over the balance of the year, but remain above potential,” the bank said in a statement.
“Growth is broadening across industries and regions and therefore becoming more sustainable. As the adjustment to lower oil prices is largely complete, both the goods and services sectors are expanding.”
Consumer spending is expected to continue to be a significant contributor to the economy, but the bank said it believes high levels of household debt and a slowdown in the housing market will weigh on spending.
Automakers are poised to sell a record 2.1 million new vehicles in Canada in 2017, up from the 1.95 million they sold last year.
“The good news is that our economy is growing, and that’s good for our business,” Hatch said.
Dealership owners shouldn’t see much of an effect either, Hatch said.
“Debt is important at the corporate level, as well. Dealers need to incur debt to finance inventory and other aspects of the business. If that’s on a variable rate, they might see an effect,” Hatch said. “But it’s not anything that imposes a huge challenge for dealers in this economy.”
Hatch said “these have been extraordinary times for monetary policy” and that “we’re now finally shaking off the hangover of the financial crisis” of 2008 and 2009.
“I don’t think anyone is predicting a severe, rapid, intense campaign of rate hikes. The Bank of Canada will likely raise rates a few more times,” Hatch said. “I think we’re on a path to more normal interest rates. Dealers … will have time to adjust.”
Prior to the Bank of Canada’s rate hike, Carlos Gomes, a senior economist and auto analyst at Scotiabank, said it will be a while before an increase affects sales.
“It increases the cost of incentives, such as zero-per-cent financing, but it will not keep the industry from setting an annual record this year,” Gomes said. “The impact of higher rates will only be felt in 2018, as rates continue to move higher.”
The Canadian Press contributed to this report.