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COVID-19 Vaccine News Adds $1.02 Billion In Interest Costs To Canada’s Federal Debt In 1 Day

Good news for the global economy is bad news for borrowers.
Svetlana Kinzerskaya via Getty Images

Pfizer’s announcement of an effective COVID-19 vaccine earlier this week may be the best medical news the world has received since the eradication of smallpox in the 1970s.

But it may not be good news for the taxpayers who will be on the hook for Canada’s newly outsized federal debt.

Interest rates on government debt worldwide jumped in the wake of the vaccine announcement, with investors now expecting a much faster economic recovery from the pandemic lockdowns.

The rate paid on 10-year Government of Canada bonds jumped to 0.75 per cent, from 0.64 per cent in one day following the Pfizer announcement. That represents an additional $363 million in interest on the $330 billion the feds borrowed this year, and an additional $1.02 billion in interest costs on the entire federal debt. (That excludes provincial debt, which is also growing rapidly.)

And that’s just from one small bump in rates, which remain near record low levels for now.

Watch: Consumer debt in the pandemic. Story continues below.

This vulnerability is why many financial experts say the government needs to focus on controlling spending once the pandemic is over. Canada has been running up debt at the fastest pace of any G20 country during the crisis.

Other borrowers could also feel the pinch, with some market observers wondering how long rock-bottom mortgage rates can last.

“If Canadian (economic) growth were to outperform, it could bring forward the timing of future interest rate hikes” at the Bank of Canada, economist Stephen Brown of Capital Economics wrote in a client note this week.

Brown expects that if Canada’s economy does well, however, it will cause the loonie to rise, which would reduce inflation and put a damper on any interest rate hikes.

Brown noted that Pfizer’s vaccine announcement also caused oil prices to jump, a rare bit of good news for Canada’s oil-exporting provinces.

This “bodes well for a faster rebound in energy sector investment than we have assumed, and a vaccine would facilitate a quicker rebound in immigration, which would remove some of the downside risks to residential investment from the sharp falls in condo rents in some major cities,” he wrote.

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