Can Interest Rates Stay Low Until 2016?

Posted by Alan Zunec on Monday, October 21st, 2013 at 5:39pm.

Most of the world’s economic attention is focused on the United States and the literal cat fight going on in Congress over a government shut down and the raising of that country’s debt limit. But Canada is making news of its own on the economic front. Rather than have the interest rates boosted sometime in 2014, ScotiaBank has hinted that increase won’t come until 2016.

Economists are divided over the benefits of this outcome as well as exactly how close to 2016 the raise in interest rates will come. Most of those in the know are thinking the rates will probably go up by the end of 2014 or in the early part of 2015. Only a few are on board with the ScotiaBank’s prediction/statement.

The actual date of the increase will be determined by economic growth. Tiff Macklem from the central bank noted that the increase will not go into effect until Canada’s economy is showing an annual increase of 2.5 percent. Until then the 1 percent interest rate, in place for three years, will stand. As an example, in the last 12 months ending in June of 2013 the economy only grew by 1.4 percent. That is only expected to increase to between 2.0 and 2.5 percent by the end of this year, a slower growth than previously predicted.

Some economists are applauding this move, noting that the low interest rate will continue to stimulate the economy by encouraging spending. Buyers will be more apt to purchase big ticket items, particularly cars and homes, if they can get financing at a lower rate. But others, including some at the Bank of Canada, are worried that the low rates will encourage Canadian’s to buy more than they can afford. The low rates also mean lower yields for those with savings accounts or pension funds.

The Bank of Canada will not give any definite word on interest rates until later in October. Until then it is, like always, a wait and see guessing game. Some analysts are critical of ScotiaBank for jumping the gun, but the bank stands firm on their statements. Reasons cited include the economic figures as shown above and the likelihood that the economy will stay steady but not achieve the magic 2.5 percent number.

So exactly how much does that fiasco going on in Washington affect Canada? Economically, probably more than we’d like. The Bank of Canada is waiting to see if the Federal Reserve of the United States raises its borrowing rates. So far, that’s not happening.  No doubt the raising of interest rates in the United States will have to wait until Congress irons out its current issues. Ever heard the expression herding cats? Ever tried to get a cat, let alone a herd of them, to do what YOU want? Not going to happen. Sounds like Washington, except in Washington there is currently no one even trying to herd some very stubborn cats.

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