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Will the Bank of Canada Lower Rates this Week?

4 March 2013

The word has long been that Mark Carney, Bank of Canada governor, would soon be raising interest rates now that the near-crisis in housing seems to be dying down, and government officials continue to become increasingly worried about debt. But whether or not that rate will be increased is something we’ll all see this Wednesday, when Carney makes his big announcement. And many people think that, instead of raising the current interest rate, that the Bank will actually lower them.

The reasons for a possible rate decrease are plentiful. The labour market hit a huge wall in December, with many thousands of layoffs and plant closings. Stats Canada also reported last week that the economy had grown by just 0.6 per cent in the last quarter of 2012. While the economy is expected to pick up in the later half of this year, it’s expected to get off to a slow start. And that is what we’ve been seeing so far.

Stats Can also reported that Canadian businesses, one of the few stable rocks the Bank is counting on, are expected to increase their spending by just 1.7 per cent on things such as machinery and equipment. That’s significantly weaker than what the Bank was expecting as well.

It’s all of these factors that have many believing that we could still see another cut to interest rates yet. Nathan Janzen, economist at Royal Bank of Canada, believes that interest rates could very well drop this week.

“As a result, weaker than expected investment spending, along with weaker than expected growth and inflation numbers over the second half of 2012 and moderating household credit growth, supports our expectation that the bank will further water down its current tightening bias in next Wednesday’s policy announcement,” he said.

David Madani of Capital Economics, chimed in and agreed by saying, “Although overnight interest rate expectations and two-year government bond yields have declined marginally over the past few days, we still think that market expectations of eventual rate hikes are over the top. Given the recent spat of weak economic data, below target range inflation and the presumably widening output gap, the market’s ruling out of interest rate cuts makes little sense.”

What do you think? This Wednesday do you think the Bank will cut interest rates, raise them, or do what they’ve done for the past two years and just leave them right where they are?

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