Interest Rates Heading Lower Again?
Published Feb 28, 2014
Improving economic growth, an increase in inflation and the dreaded taper were supposed to send long-term interest rates higher in 2014. Yet, through the first month of the year, Canadian interest rates have plummeted. So what happened?
A major factor has been a change in the forward guidance relayed by the Bank of Canada. The Bank’s previous rate-tightening bias seems to have been lost in the transition from Marc Carney to Stephen Poloz. Governor Poloz has thus far placed far more weight on persistently low inflation over household imbalances caused by high personal debt burdens and elevated home prices.
The change in messaging has been remarkably effective at not only arresting the upward movement in long-term rates, but also prompting a significant decline in the Canadian dollar. The latter should begin to put upward pressure on consumer prices relatively soon, which in conjunction with an accelerating economy, may prompt long-term rates higher in the second half of 2014.
This is a great time to buy!