Canadians can expect rates to stay ultra-low until 2016, according to Bank of Canada Governor Stephen Poloz. The top banker made this revealing statement at a Saskatchewan luncheon this week, adding that even if Canada’s economy returns to full capacity, rates will be slow to follow. While improvements in the U.S. have sparked speculation Canadian rates will rise in the shorter term, Poloz maintained that inflation must reach 2 per cent before any change occurs.
A Return to Normalcy
The overnight lending rate, which determines floating or variable rate loans, has been at 1 per cent since September 2010. But rates had been ultra low as early as 2008, even dipping as low as 0.25 per cent in 2009.
This was all in name of protecting the Canadian economy during the financial crisis. However, the issue now is consumers’ reliance on super low rates – the Bank of Canada must help Canadians readjust to normal borrowing conditions.
Record low rates stoked Canada’s debt loads, and contributed to an overheating housing market – though Poloz remarked that the risk posed by the housing bubble is “subsiding”.
A Stronger U.S Economy
Meanwhile, signs of economic recovery strengthen in the U.S. This week, the U.S. Federal Reserve announced another $10-billion taper to its bond buyback program to $45 billion.
This quantitative easing was implemented during the height of the financial meltdown. It’s now unnecessary, as the U.S. economy is showing signs it can survive without government intervention. This has led to a stronger U.S. dollar and renewed interest for foreign investment there. For Canada, this puts additional pressure on our Loonie – but it’s a positive sign. As business picks up in the U.S. it will benefit Canada’s manufacturing and export sectors and a cheaper Loonie is good for business.
What’s to Come for Canada?
Lingering low rates aren’t an indication that Canada is struggling – in fact, it’s the opposite. Poloz noted how our resource sector continues to prop up the economy and salaries. He also forecasts Canada’s Gross Domestic Income (GDI), a measure of our nation’s overall purchasing power, to be 7 per cent higher than it was in 2002.
Referring to Canada’s economy as “hot or not”, Poloz states the Bank of Canada “Takes a broad view of Canada as a whole, but depending on where you work and live your view of how Canada is doing will differ.”
Use Low Rates to Get Ahead of Debt
A low interest rate environment offers a great opportunity for Canadians to pay off record amounts of debt. It’s currently one of the cheapest environments for debt – take the chance to get it under control!
For homeowners looking to renew their mortgage or get a new loan the key is to shop around and negotiate. Rate are low and borrowers should take advantage of that. In my opinion always make loan payments as if they are two or three points higher. Your debt will come down faster and you will be in a better position when rates, eventually, start to rise.