The Bank of Canada has released its latest interest rate decision and the result is not good. Canada is suffering from a double dip in the economy and this is not good news for Canadians. For one thing, this country has been experiencing double dips before so how is this related? The answer is that it is related because of the poor state of the economy in general. There are many indicators out there that are pointing to Canada’s economy being in trouble but none of them point directly to the Bank of Canada.
The first thing you need to understand about the recent Bank of Canada decision is that it is not a rate cut. What the bank did, instead, was to release two different interest rate quotes, one for borrowers and one for lenders. At the same time, the bank also decided to keep its target overnight rate fixed at a still very low level of two per cent. This is a rather strange move on the part of the bank considering that over the last few years, they have been telling us that the two per cent target overnight rate is too high and will cost too much if they were to be brought down. Now, they seem to be backing away from that position.
For most of us, two per cent is nothing to smile about. We know that it is difficult for banks to stay flexible when there are always risks involved when it comes to their balance sheets. However, this does not mean that the two per cent overnight rate is not important. If the Bank of Canada were to keep its overnight rate fixed at current levels, then the economy would suffer from a drag, especially in the manufacturing sector of the economy.
At the same time, if it were to increase the prime rate, this would also drag down the economy because as more money is put into the hands of lenders, more individuals (which is the core group of the population) would have access to loans. This means that the economy would either slow down or perhaps even pick up some. We can see from this how important it is for the Bank of Canada to maintain a canada prime rate with its mortgage loans. That way, they can make sure that the economy remains on track and doesn’t get an increase which could do significant harm.
Two percent is nothing to sneeze at, but if it were to go up to the maximum of two percent, which is the current level of the Bank of Canada’s target overnight rate, this would indeed have a negative impact on the economy. That is exactly what the banking industry fears, especially since many investors have become aware that they can use a two percent increase to simply drive the economy into a tailspin. The outcome can be a recession. It is not impossible, however, to see how a recession can affect the economy. With the unemployment rate currently around seven per cent, many feel that even a small increase in the overnight rate might cause too much of a hit. Right now, many economists are predicting that two percent will hit, which is about what the Bank of Canada has estimated.
In the end, what all the concerned parties seem to be concerned about is the potential for the Bank of Canada to hike up the pre-announced rate when it does finally raise its base rate. With many financial products having already been affected by similar moves by the bank, the potential for negative repercussions can no longer be ignored. In the end, it is up to the government to decide whether the hikes are necessary, although it is also up to the private sector to ensure that their products are not being affected in any negative manner. Regardless of whether or not the Bank of Canada raises its rates, we can only hope that it stays true to its promise of keeping the economy on track and does not risk negatively impacting all its borrowers. If the government keeps its promise, then we can expect good things for all Canadians.