I came across a number of articles today on Canadian interest rates and projections for where they are going and like usual, the prognosticators are all over the map.
But this time at least, I believe its for good reason.
The governor of the Bank of Canada uses interest rates like a gas peddle to manage inflation in the economy. Inflation becomes an issue with the actual production capacity of the country starts to reach the production potential. As production potential is reached, inflation can start to build quickly.
Over the last 6 months, Canada has seen a higher than expected level of growth, narrowing the gap between actual and potential production capacity with experts now saying that capacity could be hit in 2012.
Because it can take a while for the brakes to come on with interest rate moves, it would seem that larger interest rate increases are coming and may need to happen more often which will directly impact your business financing plans going forward.
But then, there’s the other side of the coin.
The recent spike in the value of the Loonie against USD is likely going to slow down economic growth as exports start getting too pricing. And if the Loonie stays above the U.S. dollar for an extended period of time, the economy could very well slow down on its own.
And if you prematurely increase the interest rates, the Loonie could go even higher has holders will be getting a higher return for their money creating increased demand.
For more background on this topic, here is pretty good article you can refer to… http://www.theglobeandmail.com/report-on-business/economy/loonie-could-slow-growth-for-years-bank-of-canada-warns-in-report/article1983484/?utm_medium=Feeds%3A%20RSS%2FAtom&utm_source=Report%20On%20Business&utm_content=1983484
So with all that being said, what is going to happen?
If you leave interest rate increases too long, there may not be enough time to react and you run into inflationary impacts.
If you increase interest rates too soon you could help stall out the economy due to the likelihood that the Loonie is going to stay at a high level for a while, potentially even years.
Because of where we are at right now, its almost a given that interest rates are going up. Inflation can become a run away train that creates the next recession sooner than later, and the Bank of Canada is going to do everything in its power to not let that happen
The questions that remain are how much and how often?
Right now, the experts are calling for modest increases in July.
That could hold.
But an increase could also be sooner and higher than expected as well.
Your guess is as good as anyone’s at this point.