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Will Rates Stay Low Until 2014?

28 June 2012

Mark Carney made it abundantly clear at a meeting of business professionals in Halifax last week that interest rates would not be lowered even further; and that those who thought they would be should make sure their finances are in order for when those rates actually rise. And while, in the world of interest rates, what goes down must eventually come back up for air, CIBC doesn’t think they’ll rise any time soon.

CIBC recently released their economic outlook report which indicated that the bank thinks interest rates will remain low for quite some time; in fact, until 2014. This they say, is due to the fact that Canada is currently “barely keeping its head above water,” and Mark Carney’s low interest rate is one of the only things we have to keep it churning along, and prevent it from sinking altogether.

“The global economy hasn’t fallen off a 2008-style cliff, but it’s been too close to the precipice for investor comfort,” said Avery Shenfeld, CIBC chief economist when the report was released.

The report showed that because the global economic growth for the year is set at only 3 per cent, CIBC thinks that Canada has no choice but to follow, especially considering that the United States has been experiencing a “half-speed recovery.”

But why are we always comparing ourselves to the States? As economist Benjamin Tal said, that’s dangerous behaviour because our economies are completely different from each other, especially when you compare the two current housing markets in both countries – one of the driving forces of the economy. Yes, what the States does and how they’re doing has an impact on us. But thinking that our interest rates will remain low for another year to two years simply because it will in the States, is the kind of dangerous thinking that leads to collapse.

But, the bank says, it’s not just the global economies that are going to keep our interest rate at ridiculous lows for some time to come – it’s also what’s happening right here at home. According to CIBC, with consumers that have less in their budget and a government that’s cutting back on their spending, these factors too, will also keep the interest rates low. But isn’t the government actually concerned about the amount of overspending those “cash strapped” consumers are doing? And haven’t they been warning us for months about the amount of home equity loans and HELOCs we’ve been taking on?

It’s true that the government is concerned about our overspending. And it’s true that there’s a fine line between them wanting to raise the interest rate, and them actually doing it. But no one should count on interest rates remaining so low for the next two years. While it would be nice, if we bank on it, we could be sorely disappointed if the increase arrives much sooner than that.

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