WEALTH Matters — WINTER 2012

INTEREST RATE TRENDS

Market interest rates decreased in the final quarter of 2012 on all terms, with 4 and 5 year terms hitting new post-2008 lows. The graph at right compares the top GIC rates from over 30 financial institutions for 1 to 5 year terms over the past four years.

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Also in this issue of Wealth matters:

RRSP vs TFSA

Interest Rate Trends

Investment Market Commentary

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RRSP vs TFSA

Interest Rate Trends

Investment Market Commentary

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The Bank of Canada keeps signaling its desire to raise the short term rate to discourage growth in consumer indebtedness. But debt levels already began to fall in the 4th quarter in response to tightening of lending rules earlier in the year. As well, the inflation pressures expected with extended periods of low interest rates have not materialized.

Declining interest rates mirrored continued declines in inflation as measured by the Consumer Price Index. Total CPI inflation is now below the Bank of Canada’s 1-3% target range. Even core inflation (which excludes volatile components such as food and energy) continued to decline during the quarter.

Employment growth was 2% from a year earlier but unemployment still measured over 7%. Capacity utilization was up 2% but is still only at 81%, and December retail sales were weaker than expected. Over half of businesses now expect inflation to continue below 2%.

There seems to be little inflationary pressure on the horizon that would spur the Bank of Canada to move to raise interest rates. The US will at some point have to reduce the amount of bond market repurchases it makes, thereby allowing rates to rise slightly, but its need to bring its budget closer to balance should encourage it to keep interest rates from rising by much, and low inflation there should help keep rates down.

 

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