Faster interest rate hikes shadow federal plans to manage debt

Bank of Canada's warnings of rate hikes sooner than previously expected has coloured federal efforts to craft an annual plan to mange the debt.

The Bank of Canada‘s move to end its pandemic-driven purchases of government bonds to stimulate the economy, and warnings of rate hikes sooner than previously expected, has coloured federal efforts to craft an annual plan to mange the debt.

By the bank’s own estimates, its program dropped rates of return on short-term government debt by 10 basis points, or one-tenth of a percentage point.

It also likely made buyers think more about long-term bonds that lock in debt at today’s low interest rates.

Wednesday’s move by the bank to end the program, known as quantitative easing, and foresee a rate hike sooner than expected helped push up returns on short and medium-term bonds.

As rates go up, so too will the amount the government has to pay, which one expert suggests might make the Liberals more cautious about deficit spending and the debt itself.

Rebekah Young, Scotiabank’s director of fiscal and provincial economics, also says federal debt costs should remain low by historical standards even as rates approach pre-pandemic levels, but that could change because of the unpredictability of the pandemic.

The parliamentary budget officer has previously estimated that a sudden rise of one percentage point in rates could increase public debt charges by $4.5 billion, growing to $12.8 billion more after five years.

“I think it will change the language that the government uses and there will be a pivot this year,” Young said of the debt and rising rates.