Canada Interest Rate Cut T 0.75%

[Big Guy]

Just saw an announcement from Bank of Canada that it has just cut Canada's interest rate to 0.75%. This cut appears to be making lots of folks nervous.

Is this a good thing or a bad thing for Canada?

[Guest]

Well, on the one hand...

[GostHacked]

Lower interest rates should always good for the consumer.

[TimG]

Is this a good thing or a bad thing for Canada?

Probably bad because the real estate bubble will continue to inflate.

[GostHacked]

Probably bad because the real estate bubble will continue to inflate.

With Vancouver having a very over inflated housing market, I think we will see the pop start there.

[Wilber]

It means the BoC doesn't think the economy is strong enough to cause inflation and it still needs to stimulate spending by providing almost free money to people who are already carrying too much debt. It's not a good thing.

[eyeball]

It certainly conjures up an image of an economy that's barely hanging on by the skin of its teeth.

So I wonder if a snap election might be in the works? Better on the eve of destruction than the morning after one would think.

[On Guard for Thee]

Perhaps the B o C is trying to coax Oliver/Harper out from under their fiscal bed and deliver the promised budget, even though it will reveal serious shortcoming with their all eggs in the "drill baby drill" basket, so the rest of the world can get on with it. And yes, were I a betting man I'd be leaning towards the snap election come spring. Harper will I'm sure employ every dirty trick he can think of out of desperation.

[dre]

Just saw an announcement from Bank of Canada that it has just cut Canada's interest rate to 0.75%. This cut appears to be making lots of folks nervous.

Is this a good thing or a bad thing for Canada?

Its both.

Easing credit in response to low economic growth certainly DOES stimulate growth in the short term. It also creates asset bubbles in the long term and those can lead to recessions (like the 2007 meltdown) or even depressions.

It also encourages risky lending and mal-investment.

In the most simple terms easing credit moves future consumption to today. Low interest rates make money easily available, and they encourage debt-financed consumption. But thats all consumption that now WONT happen tomorrow because consumers will be spending more of their income paying off new debt.

I also think that if the Conservative Party had a big lead in the polls they would have sat on the rate or possibly even raised it. Theres a political calculation here... They probably believe that the short term kick in the ass this reduction can give the economy help them win the upcoming election, even though they know it will come back to haunt them in a few years if they do win.

[dre]

It certainly conjures up an image of an economy that's barely hanging on by the skin of its teeth.

Yes, well if you look at interest rates for the last 5 or 6 years they betray the fact that the government despite all their talk has a very bleak outlook on the economy. You keep rates low to keep an economy on life support so that it wont slip into recession.

This will worry economists but your average dumbass Canadian will take this as a signal that he should take out a HELOC against the imaginary equity in his 30% over-valued home and buy a fancy car or a boat. It should give the Harper government a nice little boost in the polls among voters that arent good at math, and dont understand economics. Its a pretty smart political move IMO.

[Wilber]

It's more serious than just politics and it isn't all joy for the consumer. It caused the loonie to drop below 81 cents, increasing the cost of imports so that fancy car or boat is going to cost them more.

Edited January 22, 2015 by Wilber

[msj]

I agree with Wilber and eyeball: not good and it may lead to an early election.

Interesting that our yield curve has partially inverted which is also not a good sign.

With deflation around the world and the hopefully temporary end of the commodity super cycle it looks like Canada gets to stress test its banks a bit.

Watch Canadian Western Bank since it has more exposure to the effects of a lower oil price - just look at its 3 month chart compared to the other banks.

Or buy put options on it for anyone who wants to be a "Canada hater."

[Topaz]

One thing I can't understand is why the Bank of Canada so concerned over people in the Oil sand industry unemployment when they weren't when the manufacturing industry lost over 400,000 jobs in Ontario/Canada? Yes, they did give money to the auto industry, but the workers who did lose their jobs, didn't get a % drop in interest rates to help them. Many of them had to use their RRSP's, any savings, before getting EI, which is like welfare amounts.

[TimG]

One thing I can't understand is why the Bank of Canada so concerned over people in the Oil sand industry unemployment when they weren't when the manufacturing industry lost over 400,000 jobs in Ontario/Canada?

Gradual changes have a different effect than a sudden step change - even if the magnitude is similar. Also the drop in oil reduces inflation which makes it easier to justify a rate cut. Edited January 22, 2015 by TimG

[dre]

One thing I can't understand is why the Bank of Canada so concerned over people in the Oil sand industry unemployment when they weren't when the manufacturing industry lost over 400,000 jobs in Ontario/Canada? Yes, they did give money to the auto industry, but the workers who did lose their jobs, didn't get a % drop in interest rates to help them. Many of them had to use their RRSP's, any savings, before getting EI, which is like welfare amounts.

They ARENT concerned over people in the oil sand industry. They are worried about a short term recession. In the long term cheap fuel and a low dollar is a boon for the Canadian economy. It makes almost everything we do more competitive.

[msj]

Dre makes a good point about the low dollar.

I have heard on the news this morning everyone talking about when/if the banks will pass the cut along and how it will effect people's mortgages etc...

Well, most people have fixed mortgages and mortgage rates are set in the bond markets which are not directly tied to the prime rate so the effect will be very little at first and not very much over the next several months to a year.

The big impact from this is a lower Canadian dollar which helps out oil companies, gold, forest, manufacturers etc... since so much of what we sell is eventually priced in US dollars.

Lumber, for example, may be down to $312 from $360 in USD.

In Canadian dollars, however, it's not down nearly as much and, therefore, my forestry investments are holding up just fine (knock on wood).

To some extent the same can be said of oil stocks. Look at Suncor in relation to the price of oil and the Canadian dollar from November, 2013 to June, 2014 to January, 2015. An interesting relationship.

Of course, Canada has had interest rates low for a long long time while the United States has held low interest rates and implemented several rounds of quantitative easing (i.e. "printing money" and buying bonds to influence interest rates in the bond market) for as long.

The US has had a weak dollar policy in the past few years to help them deal with the Great Recession. That policy is diminished or effectively ended now so the USD is becoming stronger in the face of weak European demand and a slowing China.

This allowed commodity prices to rise, in CDN dollar terms, which allowed Canada to do okay during this time.

With the exception of manufacturing which was dealing with a higher dollar making it less competitive.

Throw in crazy people borrowing crazy money to buy houses at crazy prices and we potentially now have a recipe for disaster.

Some of this may be laid at the feet of the government (such as boneheaded rules making it easy for anyone to buy a home, for example) but most of it is/was beyond the control of our governments and the Bank of Canada.

But now, thanks to slowing Europe/China and lower commodity prices, our dollar will naturally weaken.

The Bank of Canada will also want to weaken the dollar since the lower commodity prices are slowing our economy down in general overall.

There are a lot of moving parts here and not all of them are controllable.

[overthere]

One of the purposes of lowering the bank rate and now to lower the prime rate is to stimulate the housing market.

In recent years the government(often through their policy instrument CMHC) have sought to slow down the housing market, with Vancouver and Toronto as specific targets.

It will be interesting to see if CMHC comes out with revised regs on amortization periods, another useful tool.