As was expected for quite some time now, the Bank of Canada has finally increased its benchmark or standard interest rate by one-fourth of a percentage point to 0.75 per cent. At the same time, the central bank of Canada has predicted a more dismal economic scenario for the country. It may be mentioned here that in the wake of the recent global recession, the central bank had introduced a historically low interest rate with a view to boost the nation's economy.
Even the global economy has begun to show signs of a sluggish recovery from the worst-ever recession; the central bank of Canada raised the interest rates twice in two successive months. Nevertheless, Mark Carney, the Bank of Canada governor, has lowered the anticipated growth of Canada's GDP for the current year from 3.7 per cent to 3.5 per cent. Similarly, the Bank of Canada's forecast for the project GDP growth rate for the country also plunged from 3.1 per cent to 2.9 per cent for the year 2011. Contrary to earlier predictions that the Canadian economy would begin to soar once again from spring next year, the Bank of Canada said that it doesn't anticipate the country's economy to speed up till the end of 2011.
A statement issued by the Bank of Canada said that the modification in the benchmark interest rate is an indication of a somewhat feebler outline for the economic growth worldwide and a reasonable consumption in Canada. Meanwhile, an economist with the TD Bank Financial Group, Derek Burleton, has described the recent realignment in the interest rate by the central bank as fitting.
Substantiating his view, Derek Burleton says that the Bank of Canada had to take into account several aspects, including the weaker economic growth in the United States, a slowing down economy in China as well as the prevailing debt crisis confronted by Europe before revising its benchmark interest rate. He further said that the hike in the interest rate provides the Bank of Canada with some space to maneuver in case of another recession. In the event of the country's economy going to the doldrums once again, the central bank will be equipped to effectively 'hold out'.
In an interview to CTV New Channel in Toronto, Burleton said in case one looks back in history, he or she would find that despite the hike of the benchmark interest rate to 0.75 per cent, it would be considered a very low interest rate anywhere. According to Burleton, this is among the challenges faced by the Bank of Canada - they are required to make a decision now founded on an extremely unsure future.
In the meantime, the revision in the central bank's benchmark interest rate has already affected the mortgage market as there has been a noticeable decline in the housing activity. Although the slow recovery of the economy has resulted in growth in the employment sector, investment in businesses seems to be withheld owing to the ambiguity in the global economic growth. The statement issued by the Bank of Canada said that the economy in several countries across the world have still not recovered from the stern austerity measures or sharp contractions adopted during the recent economic slump.
Generally, the major commercial banks also raise their main interest rates subsequent to any revision of the benchmark interest rate by the central bank. In this case, the variable mortgages are expected to be affected considerably when these commercial banks also hike their prime interest rates in response to the Bank of Canada's recent announcement.
According to Michael Kane of Business News Network (BNN), the Bank of Canada is of the view that the global economic recovery is taking place, but has not still become self-sustaining. In an interview to the CTV News Channel, Kane said that on the whole the central bank is saying so because of the unsure economic conditions prevailing worldwide that has actually led the families to cut down on their expenses and the businesses to downsize their operations as well as investments.
It may be noted here that the Bank of Canada's next announcement regarding interest rate is expected on September 8 this year. According to a number of economists, by the end of 2010 the benchmark interest rate of the central bank will touch 1.25 per cent. Derek Burleton is of the view that the Canadians will witness another quarter-point hike in the central bank's interest rate by September next and then the benchmark rate would be stable at 1.0 per cent for some time, probably a few months. According to the economist with the TD Bank Financial Group, as far as the issue of hiking the interest rates is concerned, the watchword for the Bank of Canada now is 'gradual'.
Before concluding, Burleton said that on an average, they were presently watching deeply indebted consumers who have borrowed heavily when the interest rates were historically low. Now, as the Bank of Canada has been increasing the benchmark interest rate gradually by hiking it in installments of a quarter-point of a percentage, it is expected to provide the consumers an opportunity to take in some of the interest rate increases. At the same time, Burleton pointed out that even the quarter-point of a percentage rise in interest rate would seem to be a significant hike for most consumers, who have been enjoying a historically low rate of interest for some time now.