WEALTH Matters — FALL 2010

INTEREST RATE TRENDS

The third quarter saw a dramatic reduction in longer term interest rates. Slowing economic growth statistics all but eliminated fears of increasing inflation in the near term.

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The Bank of Canada will be limited in future rate increases by the Canada-US exchange rate. The US appears unwilling to raise their interest rate since their economic recovery is much more fragile than ours. Increasing Canada’s rates while the US leaves theirs at historically low levels will put upward pressure on the value of the Canadian Dollar, making our exports less competitive. It is widely expected that the Bank of Canada will therefore hold off any further interest rate increases until 2011, and may even wait until US central bank rates begin to move upward again.

As in the past, a portfolio of longer term GICs, with maturity dates spread out over time, provides a higher average return over time and less fluctuation in the overall return.

Interest Rate Trends

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Short term rates continued to increase as the Bank of Canada increased interest rates 3 times in the summer to signal to consumers that rates won’t stay this low forever, and that they should keep their personal debt levels under control. The government is walking a fine line between preventing a runaway debt-driven expansion and choking off the economic recovery too quickly. Ironically, the short term rate increases contributed to a reduction in growth forecasts, which reduced inflation expectations, which in turn allowed longer term rates to drop.

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