Bank of Canada governor, Mark Carney, has been warning about household debt since 2010 or ever since our benchmark interest rate settled at 1%. Unfortunately for Carney, besides repeating his dire warnings, there’s not much he can do right now because a few variables are forcing him to stay the course for longer than anticipated. The most important factor tying the governor down is the pledge of the Federal Reserve to keep interest rates near zero until late 2014. That’s a 1 year extension from the original pledge. It is clear that the Bank of Canada has very little manoeuvring ground with interest rates simply because any one sided hikes will be painful for manufacturing and exports particularly now that our currency is trading at parity with the USD. The governor will have to be very patient before raising the Canadian benchmark rate which means for 2012 an interest rate hike is highly unlikely.
All is not well
The world is about to end again, well you would get this impression only if you were following the stock market. The TSX wiped out its advance for the year as markets signal all is not well in Europe. We all know the debt issues in Europe are not totally fixed with Spain emerging as the next candidate in line for a “Greek Drama” this summer. Investors will need reassurance in the form of action from the ECB as well as improving employment numbers and decent quarterly earnings in the US as a sign the recovery might have been shaken but not broken.
What does this mean for you? Well if you’re in debt, you still have time to get it under control. Got a mortgage with a variable interest rate? Chances are you will continue saving tons of money well into 2013. In my case, my variable rate mortgage that I took back in 2008 is due for renewal in 2013 which means 5 years of lofty savings! We all know rates will end up rising eventually so make sure you’re benefiting from this period by putting your savings back to work reducing outstanding debt and making lump sums on your mortgage. For those amongst you who are fans of saving money in low risk vehicles, you’re going to have to wait a few more months until you get to enjoy a small pay raise.
A Wild Card
You might have noticed Carney’s speech was more upbeat than usual on April 2 as he saw a stronger Canadian economy than the bank expected but he also warned that “The bank will take whatever action is appropriate to achieve the 2 percent CPI inflation target over the medium term,” This is where the price of oil comes in as a variable that could contribute to freezing the current benchmark rate. Strong oil prices are currently buoyed by tensions with Iran but the price of oil will deflate nicely if a showdown is avoided with the Islamic republic as the risk premium to supplies disappears. This obviously contributes to a lower inflation rate as gasoline prices drop leaving Carney pretty comfortable in keeping rates as is for longer given the strong CAD environment we are in right now. On the other hand, if the situation with Iran degenerates into all out war, oil prices will explode higher taking our Petrodollar along with it and making an interest rate hike a lot harder.
My forecast stands equal to everyone else’s forecast from banks to economists as they are what they are: predictions. However, even though the underlying variables can change pretty quickly, I do not expect the US economy to magically generate more than 300,000 jobs per month or for Europe to live happily ever after without going through some pain first especially when Italy, Spain and Portugal are all candidates for ADD this year. All in all, every variable points to a stable Canadian interest rate environment with no hikes in view for the rest of 2012 and potentially well into the first half of 2013.
What’s your take on interest rates?