Five Things to Watch out for
July 16 2015 Posted by Pauline Hardy
Five things to watch after the Bank of Canada’s latest
AHMAD HATHOUT The Globe and Mail, Jul. 15, 2015
The decision that practically gripped the nation came down this morning, as Bank of Canada Governor
Stephen Poloz decided to cut interest rates once more. The last cut came more abruptly when in
January of this year, the BoC shaved 25 basis points off what was thought to be a stable 1 per cent; it
was the first rate cut since April, 2009, and was a direct response to the steep drop in oil prices.
Wednesday’s rate cut to 0.5 per cent was less of a surprise as the economy has not rebounded as
the central bank expected. Now, not only did the BoC cut its rates, but it dramatically lowered its
growth projections for the rest of the year.
Below are five things to watch out for after the interest rate cut.
How will the banks react?
The question now is whether the banks will follow suit and cut their own prime rates in response
to the rate cut – and by how much. Toronto-Dominion Bank was the first of the big banks to
react. Shortly after BoC announcement, TD cut its prime lending rate by 10 basis points,
bringing its rate down to 2.75 per cent as of July 16.
Depending on how the others react to the cut, the country’s banks may have more customers
looking for cheaper mortgages, they’ll be able to borrow funds at a cheaper rate, and they may
not have to pay out as much to depositors. However, with cheaper borrowing rates come a hit to
their lending margins as they are largely expected to follow the rate cut by cutting their prime
rates. Time will tell how each of the banks react.
How will the housing market be affected?
Lower interest rates may add fuel to an already scorching housing market as potential
homebuyers shop for more favourable rates. A Teranet-National Bank home price index released
Tuesday found home prices rose 5.1 per cent in June from a year earlier. This frothy seller’s
market may put more upward pressure on these already historic prices.
However, with cheaper debt comes more responsibility. Homeowners are expected to still watch
their household debt.
Borrow more, invest more
With cheaper cash available comes more investing opportunities for Canadians. It is expected
that stock markets may get a boost from an increase in the number of stock holders willing to
take the risk, especially considering now that bond yields will decline further with a dip in
Drag on the loonie
The loonie reacted to the news by tumbling more than a cent to 77.5 cents (U.S.) from its
opening this morning of 78.57 cents. Rahim Madhavji, president of Knightsbridge Foreign
Exchange, said this means funds will be fleeing the country in search of better bond yields.
The money supply also dictates which way the currency will swing. When access to money is
cheaper, more people will borrow and spend. When more people spend money on goods,
suppliers of goods will increase production to meet that demand. When supply can’t keep up
with demand, the costs of goods rise, weakening the purchasing power of the currency to buy
those same goods. The loonie, as some analysts have pointed out, may have been sacrificed for
better times ahead.
Exports and imports
The weaker loonie means two things: imports are more expensive and exports are cheaper to
foreign buyers. For importers, costs may go up. Retailers, for example, may see their import
costs rise and as a result, may raise prices of goods to cover their margin loss. As for exports,
Mr. Poloz said that weaker-than-expected growth in the U.S. and China in 2015 are to blame for
some of the country’s export woes. Now, the BoC is serious about nudging exporters toward
better months. Still, it was expected – on the strength of non-oil exports, such as car parts,
lumber, machinery and equipment – that Canada would rebound from the last time the BoC cut
rates. Evidently, it did not.
Looking ahead, a lot is riding on how the U.S., Canada’s largest trading partner, manages its own
growth. Federal Reserve chair Janet Yellen said Wednesday that the U.S. central bank is on track
to raise interest rates this year. So, if exports are a primary issue for the BoC, then we will
definitely want to look south of the border intently.