Kiyoko Fujimura

Buzzbuzzhome Corp.
September 8, 2010

I wouldn’t want to be Mark Carney, the Governor of the Bank of Canada, right now. The Canadian economy is incredibly uncertain right now. First, the US economy is struggling to pick up steam and facing a double-dip recession which would severely impact Canada’s economy as well. Second, Canada’s GDP growth rate did not meet expectations in the third quarter. Thirdly, the potential housing bubble rampant in the media is still whispering in Carney’s ear “I’m looooooooooming”.

But, despite the economic indication that the future could be bleak, Carney raised the overnight lending rate by 25 basis points to 1%. But, let’s get a bit of a grip here. Sure he’s raising rates which might seem like a bad idea in the face of incredible uncertainty, but a neutral rate during regular economic times is 3.5 – 4 %. So 1% is still nothing.

And there’s no indication that the rate hikes will keep coming. According to the Globe and Mail:

…the continuing emphasis on risks from abroad and on the uncertain nature of the global recovery indicate policy makers are trying to signal to remind investors that the central bank reserves the right to pause at its next decision, on Oct. 19, to spend more time assessing how the situation in Canada and abroad is unfolding.

The bottom line? Even though Carney has proceeded with three consecutive rate hikes of 25 basis points each time, that doesn’t mean that investors can count on a continual, linear increase in the future. The growth forecasts are just too uncertain.

Banks have likely already adjusted mortgage rates to reflect this interest rate hikes (i.e. they anticipated it and already raised rates in the Spring), but if they keep going up then retail banks may be inclined to raise mortgage rates once again. Take THAT housing bubble (if you’re out there).

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