Canadian interest rate hike is put on hold

Good news for homeowners and buyers as the deepening financial turmoil in the US and Europe has all but derailed Bank of Canada Governor Mark Carney’s plans to raise interest rates this fall.

Less than a month after Mr. Carney began hinting interest rates would be going up soon, the market is now betting against such a move. Trading activity in money markets indicates that many investors now believe his hands will be tied until at least the end of the year, and possibly into early 2012.

The growing threat of another economic slowdown has left the Bank of Canada with little choice but to put off planned hikes for fear of damaging the recovery further, market watchers say. That means temporary relief for homeowners concerned about a jump in their monthly mortgage payments, but it also means low returns on savings and deposits. Low interest rates are usually a symptom of tepid economic growth.

The Bank of Canada has held its overnight interest rate at 1 per cent since last fall, and was poised to revisit an increase on Sept. 7. Boosting rates to tighten credit in Canada has been seen as one of the next steps Mr. Carney would take to control inflation and return the country to a more normal monetary policy.

“I think it’s clear that there are a lot of serious problems still in the world and it’s more likely that we’re setting the stage for a sustainably low level of interest rates for a very long time – and that the initial tightening by the Bank of Canada [last fall] was unnecessary,” said Peter Gibson, chief portfolio strategist at CIBC World Markets.

In fact, Mr. Gibson added, the possibility of rates being lowered is now more realistic than before.

Source: Grant Robertson, Globe and Mail