Interest rates in the spotlight as economy recovers
On April 21, 2009, in the midst of the worst recession in 70 years, the Bank of Canada took the unprecedented step of lowering its key
lending rate to a record low of 0.25% in an effort to jump start the economy. As the country climbs out of recession, Canadians are now wondering what will happen when interest rates rise, as predicted for mid-2010.
Over the past year, low interest rates have helped to stimulate economic growth by making it easier for people and businesses to borrow money. In Canada, consumers took advantage of low mortgage rates, leading to a rebound in the housing market. Lower mortgage and car payments left consumers with more disposable income to buy other goods and services. With cheap, available financing and resilient domestic demand, corporate Canada began investing again in machinery, equipment, and buildings.
But a rapid rise in interest rates could derail business growth and prove costly for consumers, especially new homeowners who have not evaluated their ability to carry their debt at a higher interest rate.
Furthermore, rising rates tend to dampen stock market growth, as corporate profits are squeezed by higher interest costs. Inflationary concerns could intensify hikes if domestic or global demand rises too quickly; however, economists expect a slow recovery with a strong Canadian dollar putting a damper on exports and inflation.
The good news is that even with rising rates, Canadians should still be enjoying a low-interest-rate environment, relative to historic averages.
And on the investment front, there will continue to be asset classes, market sectors, and geographic regions that should perform well, regardless of prevailing rates.