“To do nothing at all is the most difficult thing in the world, the most difficult and the most intellectual.”
– Oscar Wilde
Governor Carney will be hoping that the words of Mr. Wilde ring true in the coming months if his plans to revive the declining Canadian economy prove successful. In the face of decreased exports, poor progress in the US Government’s efforts to revive their economy and with little sign of the problems in the EU abating, the Bank of Canada (BoC) has opted against changing interest rates, as it announced on Thursday, last week. After raising its benchmark lending rate three times this year it came as no surprise to see Carney play it safe in the face of continuing international uncertainty and decreasing growth fuelled largely by a decrease in exports. The Bank of Canada’s Financial System Review for December highlighted the current plight of the European financial system as a key risk to Canada’s economic prospects. Although the report points out Canada has limited direct exposure to the sovereign debt of the likes of Greece and Ireland, were these problems to spread to more prominent members of the EU, such as Spain, it could reek havoc on the global bank funding markets. Given this level of uncertainty it would certainly seem prudent to follow a “wait and see” strategy and leave interest rates unaltered, until the degree of damage can be better understood.
The report also points to global trade imbalances and more specifically on the need for the United States (Canada’s largest export market, lest we forget) to make haste in its bid to recover from the sub-prime crisis. Canadian exports have suffered in light of President Obama’s failure to re-ignite the US economy with the unemployment rate spiking at 9.8% in October. It is difficult to see the Federal Reserve raising interest rates anytime in the near future under these conditions. Indeed CIBC Economist Benjamin Tal (speaking at the CAAMP Forum 2010) echoed the opinions of a great deal of financial onlookers when he said he was “almost positive the (U.S. Federal Reserve) will not change rates until mid 2012”. It is very hard to see the BoC diverge from their neighbour’s policy on keeping interest rates fixed in the short term. The Canadian dollar has seen somewhat of a surge against the US dollar due largely to increased commodity prices and the BoC will be eager not to further strengthen the Canadian dollar and risk further diminishing demand for Canadian goods from US consumers by raising interest rates. A rise in interest rates relative to the US would lead to future strengthening of the Canadian dollar and would further damage Canada’s competitiveness on the international stage.
With the Canadian Government’s continued hope that business investment and exports can fill the void left by decreased government spending, it is highly unlikely Governor Carney will be looking to raise interest rates anytime soon. It is with this in mind that we feel vindicated in our recommendation that a variable rate mortgage is the optimum choice for our customers over the next 24 to 36 months. In the light of such uncertainty we believe bond yields are due to fall as investors seek out liquidity and risk free returns in the wake of such international volatility and this again points to a great opportunity for our customers to renegotiate into a low variable rate.
Feel free to forward this to anyone you know who may be about to enter into the housing market or indeed anybody looking to refinance an existing mortgage. To our existing customers already subscribed to a variable rate mortgage we ask to you take comfort in the words of Oscar Wilde as you continue to enjoy the additional savings the variable rate allows. To customers yet to switch over to the variable rate we again state the case that high unemployment, steady inflation, increased international uncertainty and a need to keep our rates attractive to US importers all point to a need for the Bank of Canada to keep interest rates low for the near future.
Should you have any enquires regarding the information provided or if you want to learn more on how we can save you money, specific to your mortgage, we invite you to contact us without delay.