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What's the deal with Interest Rates?

Blog by | November 2nd, 2009

First of all, a quick explanation of Canadian Central Banking.

Controlling inflation is the sole purpose of the Central Bank of Canada and its head Mark Carney. Inflation is the rate at which the price paid for goods is increasing. The Bank of Canada has a mandate to keep prices increasing at a rate of 2% annually.

The Central Bank tries to control inflation through Monetary Policy. Monetary policy is the raising and lowering of interest rates. Lower interest rates mean that people and businesses have easier access to cheap capital. This, in turn means that they will spend more, stimulating the economy to grow. When the BOC sets higher rates, the opposite effect is achieved and prices are prevented from increasing too rapidly.

Around last October The Recession (capitalization is intentional) showed up like an economic cardiac arrest. Credit stopped flowing and banks around the world were bailed out by their governments. Virtually every central bank in the developed world and most in the developing world slashed their interest rates to near 0 to try to kick start their economies. It was an unprecedented, coordinated move.

Last week Norway became the third country to raise their interest rates since then - Australia and Israel were the first two. Many expect Canada to be the next because of the similarity of our economy the economies of Australia and Norway. Specifically, we are all commodity (energy specifically) exporting nations.

Mark Carney continually insists that the Central Bank of Canada will keep rates at these all time lows. His most recent concern is the strength of the Loonie. If the BOC raises rates, more people will want to invest in Canada increasing the value of the Loonie further. As an exporting nation, we want a stable currency, but not too high. If the value of the Loonie is too strong, less of our goods are sold to international markets. Also, inflation is still well below the 2% target, meaning that there is currently little risk associated with keeping interest rates where they are.

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So what does this mean to you – a home buyer or seller in Dawson Creek? It means that time is running short to take advantage of the greatest Canadian mortgage sale since World War II. A 1% increase in interest rates will add tens of thousands of dollars to the 5 year cost of your mortgage. I am not sure what your world looks like, but in mine, $10,000 is worth paying attention to. (Note: If $10,000 means nothing to you, please call me, I’m the agent you have been looking for).

By most accounts the world economy is strengthening. As that trend continues, at whatever pace it happens, interest rates will go up. Banks have already started to nudge market rates up. A 5 year fixed is posted at around 4.2%. Three weeks ago they could be found for 3.9%.

The point is this: As the economy strengthens, the Bank of Canada will raise interest rates. Take this information into consideration if you are in a position to act, but are hesitant. A pre-approval locks you into rates for 90 days, costs you nothing and carries no obligation to the institution that pre-approved you. Procrastination at this point in history is likely to cost you tens of thousands of dollars.