How high will interest rates rise?

Ever since the great recession of 2008, interest rates have been ‘abnormally’ low. Although there has been noise about rising interest rates, the economic argument has been weak. But the economy is getting stronger, and along with that the argument to raise interest rates is also getting stronger.

In this interview RealAg Radio host Shaun Haney talks to Farm Credit Canada’s chief economist JP Gervais about the reality of rising interest rates.

According to Gervais, the Bank of Canada (BOC ) is starting to talk about the neutral interest rate. In his words this is, “The interest at which the economy is at capacity and inflation is right on target… the neutral rate should be between 2.5 and 3.5 (per cent); we are at 1.75 now.” This would seem to indicate that the BOC is signalling its intention to continue to increase rates, and that it has the room to do it.

Gervais says that looking further down the line the market does not seem to believe that the Bank of Canada can fulfill its desire to keep increasing rates. “Short term we do expect interest rates to go up, but long term what the markets are telling us is that they don’t really believe that the Bank of Canada is going to be able to sustain this for … over a year.”

That being said, the American economy is firing on all cylinders and there are clear indications — such as full employment and rising wages — that inflation is looming on the horizon. And with rising inflation comes rising interest rates.

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