Rate Cuts Coming January 20, Say Economists

Bad news for the economy is usually good news for interest rates.  That's what they say.

Well, if that's true then get ready for some low rates.  Here's a dose of doomageddon to back it up:

• Consumer confidence is at levels not seen since the 81-82 recession.
• Canada's jobless rate is at a 3-year high (CTV)
• "We regrettably are going to have to expect continuing job losses in Canada. We are going to have substantial job losses." - Finance Minister Jim Flaherty
• December was the worst month of U.S. job losses since World War II
• The U.S. "will see the first negative reading on the U.S. consumer price index since 1955..." -- CIBC World Markets economist Avery Shenfeld.
• Barack Obama:  "If nothing is done, this recession could linger for years. The unemployment rate could reach double digits. Our economy could fall $1 trillion short of its full capacity. . . . In short, a bad situation could become dramatically worse."

Bank of Canada Deputy Governor Pierre Duguay says the BoC is considering another interest-rate cut to counteract this negativism.  Economists concur.

• According to CTV, analysts say the unexpectedly high jobless figures "will almost certainly mean that the Bank of Canada will cut interest rates on Jan. 20."
• Rates may fall 1% by later this year according to economists from CIBC World Markets and Bank of Nova Scotia. (Bloomberg) 
• TD economist Charmaine Buskas expects a potential 1/2% cut January 20
• Royal Bank’s chief economist Craig Wright sees a 1/2% cut as well, but also a “bottom” at that level. (Bloomberg) 

The Bank of Canada's next interest rate meeting is now ten days away.  Its key lending rate is currently at 1.5%, a 50-year low. 

Comments

[Canadian Mortgage]

Thanks to the Globe's Konrad Yakabuski for our word of the week: doomageddon. We won't wear it out

[VinceT]

My concern here is how do the banks react ? If the BoC cuts its rate by 1/2 % do the Banks plan to short change us again at a 1/4% or even 0% change ? Expect anything from the so-called world's best banks.

[Ratetalk]

All this talk about rate talk, we may as well have posts trying to predict the weather, in the past 3 months I have seen reports about rates going up and rates going down, why the endless pshycobabble all the time, it is what it is, like the weather we cannot control.

[Canadian Mortgage]

Hi Vince,

Good question. If the banks feel their margins have improved enough they might pass along the full cut. It's far from guaranteed though.

One thing's for sure, the banks are in one big public relations battle. No one expects the banks to lose money, but if the banks don't pass along the full cut because their margins are compressed, the public will not be understanding.

As of yesterday, the bankers acceptance rate was 1.38%, down 0.27% in the last month. That's got some people thinking bank prime may drop 1/4% or so.

Hi RateTalk,

Predicting the weather is probably easier. ;)

Nonetheless, people want to hear what the "pro's" (not us) think so rate-related stories tend to be the most popular on the site.

Incidentally, when the BoC suggests rates are going lower, they usually are. So in that sense prediction sometimes has value--at least in the very short term.

Cheers,
Rob

[VinceT]

Hi Rob,
I have little sympathy for banks that report huge profits, even in this market. Anyone who owns rental properties knows the banks have cut their lending to investors. So the least they can do is drop their rates in line with the BoC. If rates increased by 1/2 % the banks wouldn't hestiate to increase their rates. btw keep posting these types of threads, rate cuts are important and we need to let the banks know how borrowers feel.

[Al R]

As Rob hints, it usually is possible to predict what will happen to the BoC rate, at least in the short-term. In fact, central banks lose their effectiveness (i.e. legitimacy) pretty quick if they consistently make moves that people aren't expecting.

I'm not sure why people get upset when economists don't nail long-term predictions every time. They're not psychic, and don't pretend to be. Any prediction needs to be taken with a grain of salt and some critical thought.

Al R

[Admin]

The lower rates are cut now, the bigger the impact later.
If we look to the past, a lot of the 'dangerous' products are still eligible:
http://blog.tophomemortgageloan.com/2009/01/a-look-to-the-past-on-mortgage-products/
These products will still cause harm to the financial markets and should not still be in a lenders capacity.

[Aryn]

The lower rates are cut now, the bigger the impact later.
If we look to the past, a lot of the 'dangerous' products are still eligible:

These products will still cause harm to the financial markets and should not still be in a lenders capacity.

[Kingpin]

The Canadian banks continue to cheat us by doing not lowering their rates to the BoC levels.

Since they are 'protected' by the government, they should be required to pass on the discount.

We need some sort of petition.

[Kingpin]

The Canadian banks continue to cheat us by doing not lowering their rates to the BoC levels.

Since they are 'protected' by the government, they should be required to pass on the discount.

We need some sort of petition.