Prepare for higher borrowing costs as the economy blazes on

By David Olive Mon., Sept. 3, 2018

The spectre of still higher borrowing costs

Folks in the market for mortgage financing and car loans, and those determined to pay down credit-card debt in Canada's over-leveraged consumer economy, should brace for higher borrowing rates, sooner than later.

By advanced-economy standards, the Canadian economy is on fire, with expectations of roughly 2 per cent GDP growth for 2018, following up on robust 3.1 per cent growth last year.

One of the most conspicuous results the one weighing most on employers is skills shortages and upward pressure on wages. Canada is no exception to the advanced-economies phenomenon of aging workforces and a paucity of skilled workers. What those factors point to is potential overheating of the Canadian economy, with abnormally high inflation the result.

At about 3.0 per cent, inflation already is running a full point higher than central bankers, including the Bank of Canada (BoC), consider acceptable. That makes further rate hikes inevitable. There have been five of those already, since the BoC finally ended its post-Great Recession policy of easy money last July.

The market expects at least three more BoC hikes at the Bank's next rate-setting session in October, and two more in 2019.

Stephen Poloz, the BoC governor, has so far taken a gradual approach to his money-tightening policy. Poloz isn't convinced that all the slack is gone from a Canadian economy in which there continues to be insufficient job opportunity among youth, women and new Canadians. There are also potentially debilitating trade tensions to consider, as well.

But the upward drift in potentially ruinous inflation is not tenable. The question now, for Main Street and business borrowers equally, is how many more rate hikes will there be, and of what size.

David Olive. "[Excerpt} Prepare for higher borrowing costs as the economy blazes on." The Star 03 Sept 2018

Question

I just need the explanation of this case? what is the problem that is mentioned in this case? I couldn't figure out the problem since there are many hard economic word.

Thanks