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Interest rates may be set to fall
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Toronto star- While the Bank of Canada had long been expected to start raising interest rates from their historic lows, experts say the bank is now under pressure to cut them, meaning rates for everything from lines of credit to mortgages could follow.
“The market has already priced in a cut by December, and there’s some indication people believe something could be coming in September,” said David Watt, senior fixed income and currency strategist at RBC Capital Markets.
If the Bank cuts its key overnight lending rate, people with floating mortgage rates and lines of credit would be the first to see a benefit, says John Turner, national director of special lending for BMO.
“The floating mortgages and lines are based on a bank’s prime rate, and that almost always moves with the overnight rate. There’s only one time it hasn’t,” said Turner.
The yield for Canadian government 5-year bonds has also been falling lately, something which typically means fixed-mortgage rates also drop. But these aren’t exactly typical times, Turner admits.
“I’ve been in this business 27 years, and I’ve seen some strange things over the last three years,” said Turner.
Earlier this year, the Bank of Canada had hinted that it would be raising rates, likely by fall.
That, however, was before statistics came out showing that the American economy was growing at a much slower pace than expected, pointed out Arlene Kish, chief Canadian economist for IHS Global Insight, a D.C.-based economics research firm.
“In July, the outlook was that they expected the debt ceiling situation to resolve well, and in the U.S., they were expecting consumer spending to drive the economy. That’s not what happened,” said Kish.
There was also less than stellar economic news here in Canada. The country’s gross domestic product slipped by .3 per cent in May, driven largely by declines in the oil and gas sector and mining, Statistics Canada announced in late July. Most economists had been expecting a small increase after GDP was largely flat in April.
According to statistics released in late July, the U.S. economy grew by just 1.3 per cent in the second quarter, and American GDP numbers for the first quarter were revised from 1.9 per cent to .4 per cent.
The risk of the U.S. slipping into another recession makes it tough for the Bank of Canada to consider raising rates, because so much of our economy is linked to U.S.-driven exports, Kish says.
“If the U.S. brings us down, there’s a much better case for the Bank of Canada cutting rates than raising them,” said Kish.
U.S. Federal Reserve chairman Ben Bernanke said Tuesday that the U.S. central bank expects to keep its key federal funds rate near zero through the middle of 2013, because of a weak U.S. economy.
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