WEALTH Matters — SPRING 2010

INTEREST RATE UPDATE

Interest rates on GICs are continuing their very slow rise. While 5-year rates hit their low point in December, the 1-year rates were still falling in January. Since January even the 1-year rates have been rising slightly, partly in response to high demand for variable rate mortgages, on which the banks increased interest rates last year.

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What’s our outlook? There are still signs of returning inflation, especially with a very hot real estate market, so we do expect the Bank of Canada to raise the overnight rate slightly by June or July, even before the US Fed takes action.

However, the unemployment rate is still high, and the end of the federal Home Renovation Tax Credit and the coming of Harmonized Sales Tax in Ontario and BC will both have slowing effects, so the bank may wait with any decisions until July and August numbers are available in the fall.

Adding to the reasons to defer a rate increase is the strength of the Canadian dollar versus both the US dollar and the Euro. A strong currency hurts Canadian exporters, which is not good for the economy. Of course the US and Europe don’t want strong currencies either, for the same reasons, so likely  all will postpone rate hikes as long as they can until the inflation risk is clear and present.

Click here for more current articles about the economy and markets.

It is notable that the 1-year rates are still almost 2% below the lowest the 5-year rates ever dropped. Also, the 5-year rates bottomed at 30% below their June 2008 levels while the 1-year rates bottomed at a whopping 65% below their June 2008 levels. This is another example of how maintaining a ladder of 5-year GICs with staggered maturity dates can maintain a higher and more stable interest income.

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