Borrowing costs could remain low for some time By Peter Diekmeyer • Bankrate.com
Employment data released last week provides clues to not only how our economy is doing, but as to how borrowing costs will trend. Only 2,300 jobs were created in Canada during December, down from 21,700 the previous month, and the unemployment rate rose slightly to 7.6 per cent. "Slower growth in employment and output confirm that Canada's rates need to stay extremely low," said Benoit Durocher, a senior economist with Desjardins Group in a recent note to clients. "The target rate will therefore remain at 1.0 per cent throughout 2012 and 2013."
That the Bank of Canada will likely maintain a loose money supply in the face of weak job creation and growth prospects is not surprising. The central bank's move is in line with those of other major global monetary authorities, which are concerned with stimulating growth and navigating a wide variety of uncertainties, ranging from sovereign debt concerns to energy security resulting from actions by Western governments to choke off Iran's oil exports.
Bouncing back from a big hole
The U.S. Federal Reserve Board recently also made a tangible commitment in this area by extending the period during which it would keep its overnight rate at a low level (until the end of 2014) despite the fact that 243,000 new jobs were created in the United States last month, bringing its unemployment rate down to 8.3 per cent.
The U.S. central bank move provided great news for Canada because interest rates here, like so much of our economy, remain closely tied to developments there. A vast majority of our exports, a major source of Canadian jobs, head south of the border. As a result, low U.S. interest rates could incite consumers to buy more of our products, which would lead local businesses to ramp up production and increase hiring.
That said Canadian companies face continued challenges competing in U.S. markets, due to the strong loonie (which is trading at near parity, a relatively high rate from a historical perspective). This coupled with a significant drop in U.S. demand that dates back to the last recession, has made life tough for exporters. The United States, which lost close to 8 million jobs in the last recession, is digging itself out of a far bigger hole than Canada is. And although its economy grew by 2.8 per cent in real terms during the fourth quarter of last year, a substantial improvement from the previous quarter's performance, it has a long way to go.
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A sigh of relief
Europe, too, has been on the low interest rate bandwagon. The old continent's loose monetary policy has been sparked, in part, by fears of an impending recession and concerns related to the sovereign debts in several key countries, ranging from Greece and Portugal, to larger economies such as Italy and Spain. In fact rating agency Standard & Poor's recently downgraded the credit of nine euro zone countries.
Greece, in particular, which has benefitted from repeated bailouts, has been an especially tough case, due to its repeated unwillingness to fully implement austerity measures that it commits to.
The European Central Bank responded to market uneasiness by lending euro zone banks 489 billion euros (approximately $645 billion). This provided a substantial boost to the money supply, and thus indirectly eased credit conditions at a time of already extremely low rates.
However as Sébastien Lavoie, an economist with Laurentian Bank Securities, notes the measures may not be as effective as hoped for: "Despite a slight reprieve from financial stress, the situation is far from normal," says Lavoie. "A large portion of the funds that banks borrowed are being deposited at the central bank instead of being used for loans to businesses and households."
The bottom line for Canadian consumers is that their borrowing costs are likely to remain low for some time, which is particularly good news for industries such as automotive, durable goods and the housing sector. Seniors, for their part, who are living off their savings, however, will take it on the chin.
The hope of public policy makers appears to be that by keeping borrowing costs down, the economy will grow its way out of the current mess.
