A recent report from Scotia Bank had the following to say about Canadian interest rates:
“Monetary policy in this environment is expected to remain exceptionally accommodative well into 2011, keeping short-term borrowing costs at essentially ‘rock-bottom’ levels for the foreseeable future to help bolster market liquidity, facilitate refinancing activity, and promote borrowing-to-buy”.
In plain English it means: due to the slowing economic growth, the bank of Canada will be slow in raising the interest rate in the short term i.e. at least for 2011. This statement would also apply on the US in my opinion.
How much do you rely on the predictions of the big 5 Canadian banks? Do you really plan your finances based on forecasts? Come on, don’t be too impressed by the big 5 banks. The fact is they do not know where the rates will be. They are simply flipping coins so to speak. I am clearly affirming that those long titled and well paid economists with access to lots of data and surveys are not able to predict. Think about it, if they were, they would not be at a 9 to 5 job and they would be retired as millionaires on some island!
Do you think the banks would know because they are in bed with the fed? Well even if they are, they still wouldn’t know because the governor himself doesn’t know what the economy will be like in the future. He will act based on actual economic data not on 12 months future guesses. Here’s another proof, banks have to tap their crystal balls several times a year.
Check out this forecast from mid-May 2010:
And this one from end of August 2010:
And the latest one from mid-October:
You see regarding interest rates there are 2 types of people in this world: those who don’t know where interest rates will be a year from now and those who don’t know that they don’t know where the interest rates will be a year from now. Pretty simple don’t you think?
If interest rates are worrying you, act on it. Are you loosing sleep because of your variable rate mortgage? Fix your rate or simply divide your mortgage into equal portions of fixed and variable. Identify your risk level and take the appropriate action. You need to have a financial plan that takes into account your risk tolerance and alternative economic scenarios.
One can easily extrapolate economic data such as slowing growth + a weak job market indicate a hold on interest rate bumps. But remember how quickly things change, look at the contrast between Q1 and Q2 of this year. The Toronto Stock Exchange chart would easily remind you.
Do you want an easy forecast? Just like the sun will one day die on us, interest rates will be rising in the future! The good news is you only have to guess the When, the bad news; no one knows how to find the when since nobody can predict the future. Anyone who claims to be able to is lying to himself before lying to you. Assume all those predictions are for “entertainment purposes”.
Final Thoughts
While Low interest rates are great if you have a variable rate mortgage or a fixed low rate mortgage, savers and conservative investors (GICs, Bonds…) are crying foul. On the other hand, keep in mind that you will face higher rates sooner or later. Since we are all on an equal footing when it comes to forecasting, I vote for the later part. I have been holding a variable rate mortgage since I purchased my house in 2008 and intend to keep my rate variable for the next few years. I will answer the obvious “why” question in an upcoming post.
How about you share your prediction since we all enjoy the same odds?
