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Get your debt under control: Rate hikes may come sooner

These are stories Report on Business is following Tuesday, April 10, 2012. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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Rate hikes closer than we think? A new report from Bank of Montreal suggests Canadian consumers aren't just living on borrowed money, but borrowed time as well.

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As in, the Bank of Canada may be poised to begin hiking interest rates again sooner than many expect, which could leave many consumers vulnerable after their borrowing binge.

That's not to suggest that rate increases are just around the corner, only that it might be a good time to begin getting our household finances in shape.

Bank of Canada Governor Mark Carney and others have warned repeatedly that the record debt burden among Canadians is a major threat, and that at some point interest rates must rise again from their emergency lows.

Today, BMO Nesbitt Burns suggests in a new forecast that some people may be off in their timing.

"The Bank of Canada sounded more upbeat than before in its March 8 policy statement, stating 'heightened uncertainty around the global economic outlook has decreased' and 'the outlook for the Canadian economy is marginally improved,'" economists Michael Gregory and Benjamin Reitzes said in their report.

"Although temporary factors are accounting for some of the 'faster than forecast' growth and 'firmer than previously anticipated' inflation, Governor Carney asserted in an April 2 speech that 'the bank will take whatever action is appropriate to achieve the 2 per cent CPI inflation target over the medium term.' A few days later in an interview, Mr. Carney stated that, under flexible inflation targeting, the bank could use monetary policy to address household debt dynamics (deemed Canada's No. 1 domestic economic risk), if they were threatening financial stability. This barrage of hawkish rhetoric seems to suggest that rate hikes could be closer than we think."

Mr. Gregory and Mr. Reitzes believe that will happen in just over a year, in July, 2013. And when it does, the central bank will move "very gingerly." Still, they project the Bank of Canada's benchmark rate will rise by up to two percentage points, from 1 per cent now, by the time the Federal Reserve begins moving again, which they expect to see in September 2014.

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While it's clearly time to get household debt under control, some observers still don't see that happening. Toronto-Dominion Bank economist Craig Alexander said in a recent forecast that he believes the debt-to-income ratio among Canadians could climb higher still, to about 160 per cent.

Couple that with stagnating income, and you've got trouble.

Alcoa profit slips Alcoa Inc. surprised the markets late today with a first-quarter profit - a reduced profit, but a profit nontheless.

The aluminum giant earned $94-million (U.S.), or 9 cents a share, diluted, compared to $308-million or 27 cents a year earlier, but up from a fourth-quarter loss.

"We are successfully executing on our aggressive strategy to move down the cost curve in our upstream businesses, and drive to record profitability in our midstream and downstream businesses," said chief executive officer Klaus Kleinfeld. "Challenges remain in this economy, but we approach them better prepared than ever before."

Hedge fund threatens Telus plan As Streetwise columnist Boyd Erman reports today, we now know who's been messing around with a share conversion plan by Telus Corp.

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U.S. hedge fund Mason Capital has gathered up almost 19 per cent Telus voting stock, and plans to oppose the Canadian phone company's proposal to convert non-voting shares into voting on a one-for-one basis.

Given that Telus needs approval of two-thirds of the class to do the consolidation, Mason is in a realistic position to block the plan. To do so, one of two things has to happen. Turnout of investors who are in favour of the deal has to be low, or Mason has to have allies. Word is, Mason does.

CP forecasts earnings gain Under the gun from an activist shareholder and in the midst of a proxy battle, Canadian Pacific Railway Co. disclosed today that it expects to report a hefty jump in profits for the first quarter.

CP projected first-quarter earnings per share, diluted, of 80 cents to 83 cents, which it said is 300 per cent better than last year, when it was hit by weather-related troubles.

"CP delivered record operating performance metrics, with improvements over the prior year period and the average of the previous three years' first quarters, and the company continues its strong operating performance into April 2012," it said.

The railway is under pressure for change, and a new CEO, from Bill Ackman of Pershing Square Capital Management, now CP's biggest shareholder.

Best Buy chief quits Shares of Best Buy Co. climbed initially today after its chief executive officer resigned and the electronics retailer began a search for a new CEO, though it later sank along with the broader market.

"There were no disagreements between Mr. Dunn and the company on any matter relating to operations, financial controls, policies or procedures," Best Buy said in announcing the departure of Brian Dunn. "There was mutual agreement that it was time for new leadership to address the challenges that face the company."

One of Best Buy's directors, Mike Mikan, was named interim chief.

Best Buy is trying to turn itself around, announcing a restructuring just two weeks ago that will see it close 50 big stores and move to smaller outlets.

Air Canada threatens pilot chief Canada's biggest airline is threatening to disclipine or even fire the head of its pilots' union over his comments about safety.

As The Globe and Mail's Brent Jang reports, Air Canada is demanding that Paul Strachan retract his statements, in an interview on CBC's Lang & O'Leary Exchange, about the shutdown of maintenance firm Aveos Fleet Performance Inc.

"I'm saying that certainly it's a consideration for you as a traveller going forward if we are now going to, for instance, in the case of Aveos, offshore depot level maintenance activities to third parties in other jurisdictions who may or may not be held to the same standards that our people are," the head of the Air Canada Pilots Association said on the show, though he believes Air Canada is one of the safest airlines in the world.

The airline described his comments as false.

Sony forecasts hefty loss Japan Inc. is suffering.

Sony Corp. today today projected a record yearly loss of $6.4-billion (U.S.), far deeper than an earlier forecast.

At the same time, Sharp Corp. boosted its projection for its annual loss to $4.7-billion.

Sony, which, according to reports, is poised to slash 10,000 jobs, does expect to recover, and cited several reasons for its weak showing.

"We are aiming for a rebound and for this we have made management changes," chief financial officer Masaru Kato told reports in Tokyo, according to Reuters.

The severity of the loss has to do with surrending billions in U.S. tax credits.

Europe suffers There's further evidence today of how Europe's crisis is affecting global trade.

As bond yields spiked again in Spain and Italy, fresh data from Beijing showed Chinese exports to Europe weakening.

China's exports climbed in March, largely because of higher shipments to the United States. As Scotia Capital noted, exports to the U.S., Canada and other main Asian trading partners are up by 10 per cent to 13 per cent so far this year, while those to Europe have slipped by 1.8 per cent.

"China sold more to the U.S. than to the EU for a second month - Europe had previously been China's largest export market every month since June 2007," added Mark Williams and Winwei Wang of Capital Economics.

The evidence is clear within Europe itself.

Germany today reported a better-than-expected trade balance for February, but it highlighted the weakness on the continent. German exports within Europe rose 5.4 per cent in the first two months of the year, compared to an increase of more than 14 per cent to other trading partners.

"Looked at along with the Chinese data, the German numbers indicate a moderate pace to growth outside of Europe and weakness within it," said Derek Holt and Dov Zigler of Scotia Capital.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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