Canadian Interest Rates: 2011-2012 Forecast

With the federal reserves’ pledge to keep interest rates low until mid-2013, the cordon has closed around Canadian interest rates for the next 12 months in my opinion.  Mark Carney, the governor of Bank of Canada, will have no choice but to keep his rates where they are now for longer than anticipated.

This is great news for variable rate mortgage holders such as me (variable since 2008) and for those who are in debt regardless if it’s classification as good or bad. I bet you’re not thrilled with the news if you’re an adept of saving money in low risk vehicles (money market funds, GICs, etc). Unfortunately, you will have to support the pain of low rates until the economic environment changes and it will, one day.

Given the fear frenzy that we have witnessed so far this month, it is safe to expect the same Canadian interest rates for the rest of 2011 with a high degree of certainty. Always keep in mind that Canadian interest rates are influenced mostly by the US economy as they are our biggest trading partner with 74.9% of our exports in 2010. My prediction is based on a few economic factors:

  • Stubborn high unemployment in the US
  • European and US debt overhang
  • Disappointing slow growth in the US
  • A US housing market in limbo

Add to that the latest statement from the G7 central bankers meeting on August 7 promising to “take all necessary measures to support financial stability and growth” and the recipe for NO rate hikes in the short term is complete as raising interest rates is certainly not a known measure that supports growth.

But what about 2012, isn’t it too early to call? Of course not, 2012 is right around the corner and I believe Canadian rates will remain subdued until at least mid 2012 based on the factors discussed above. Let’s put it this way, economists are currently seeing another recession at a 25% chance and growth expectations for the second half of 2011 while positive at 2.3% still indicates a vulnerable economy. Energy prices have tumbled as well this month which should tame the inflation beast reducing the urgency of a rate hike.

When it comes to forecasting interest rates, everyone stands equal regardless of how many titles they hold, they are what they are: predictions. The variables underlying my expectations might change quickly as we’ve seen how the mood (markets) can swing aggressively in a short period of time. On the other hand let’s not kid ourselves too much, it will take a miracle for the US economy to start generating +300k jobs every month to accelerate its recovery and it is not in Canada’s interest to go solo with interest rate hikes as it will hurt whatever is left of its manufacturing base. Finally, keep in mind that Canada is not immune to global economic woes, just take a look at the TSX chart of this year…

In the next 12 months, a rate hike of +0.25% (25 basis points) might still happen but it will not be as surprising as a cut of 25 basis points in Canadian interest rates. I personally prefer to be surprised with a rate hike next year as a cut will indicate a worsening economic environment.

What’s your take on interest rates?