More Interest Rate Drops?
The Bank of Canada lowers rates again last week. Last week the Bank of Canada lowered its overnight lending rate to 0.5%. This is the second rate decrease in a row. The fear is that this sends a message to the rest of the world that we are concerned about our economy and its growth. We did see the value of the Canadian dollar drop which backs up this point of view.
I think the government has a very difficult job balancing the scale in this regard. On one hand they want to inspire Canadian business to take on debt and grow. This would create many more jobs and put more cash into Canadian’s pockets thus allowing more spending. My question is do these small decreases really do what is intended? Rates are already so low as it is.
With the Canadian dollar dropping down to 2009 levels Canadian companies who need to purchase US products and supplies will see a bit of an increase in their costs. Although the opposite is meant to happen. Our largest trading partner south of the border will be able to buy our goods and services at a bit of a discount now. In theory this would spur on more spending from them.
One item the critics will be watching for is job increases along with wage increases to go along with it. If this is the case then the government is doing the “right” thing. If the decrease in lending rates do not achieve this, then it will only spur on the message to the world that our economy is struggling. One thing to consider is that our government overnight lending rate is still double that of the US federal reserve’s policy rate. Recently I did an interview for a US based investment firm who wanted to know what was really going on in the real estate market here in Canada. They asked me what the mortgage lending environment was like and if I thought our real estate prices were headed for or already in a possible bubble position ready to explode. My comments back to them were that in most areas in Canada we see the markets strong and stable. National Bank’s Terenet valuation system was reporting a year over year growth of around 5% for Canada as a whole. My only caution to them was the Vancouver and Toronto condominium markets. From what I can see these properties have been almost traded as an investment commodity for several years now. Although for the rest of Canada I can see that prices would remain stable as “affordability” really does come into play there. If you ever wanted to do some interesting research just google “housing affordability Canada”. RBC puts out a really good report that shows how much of a person’s before tax dollars are being used towards their housing costs monthly.
Another important item of concern that is created with the lowering of interest rates is the monthly cost to the consumer for taking on more additional debt. Here again is the balancing act as the consumer would make additional purchases because it is more affordable now. Thus with the additional spending comes more jobs and volumes for Canadian companies. But the question becomes how much is too much. Lots of people are watching debt loads closely. For the most part from what I can see things remain in control and the desired effect is taking place.
Lastly it is interesting to note that the bank of Canada has lowered its overnight rate by 0.5% here with their last two cuts. Meanwhile our main banks here have only reduced that cost of funds to their consumers by only 0.3%. Something that causes a person to wonder where that additional savings has gone? Banks will tell you that they are keeping that safe in their pockets to offset some possible future losses. These losses would be from people defaulting on their future loan payments. Very interesting argument for sure – only time will tell.
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All the best!