Clients regularly ask about our view on the future direction of interest rates in Canada and the US.
Interest rates are a powerful tool in any governments fiscal policy. They are used, usually quite effectively, to moderate big swings in the economy.
Since the financial meltdown in 2008, most G20 countries have used declining interest rates to stabilize their economies and mitigate the financial impacts of the 2008 crisis.
The long easing of interest rates is slowly coming to an end throughout most of the G20.
That doesn’t mean that a drastic turn in rates is upon us, but the shift from super easy money and low interest rates is turning.
Economies around the world have stabilized and are starting to get the kind of traction and job creation that low interest rates were designed to achieve. It has taken almost 10 years of declining rates to achieve this.
That is positive news and has lead the U.S. Federal reserve to increase rates twice so far this year. Nominal rate increases to be sure, but a change in policy none the less. However, based on the July economic growth numbers, that were quite moderate, and fell below expectations, that may be the extent of the increase for this year.
In Canada, the interest rate environment is much the same as the U.S.
In July, the Bank of Canada raised rates for the first time in 7 years, taking the overnight rate up by .25% to .75%
As in the U.S., the Canadian economy is slowly gathering momentum, but it isn’t exactly on fire.
We believe the Bank of Canada (BoC) will raise rates later this year or early next. Markets are presently predicting a 70% chance of a second increase happening in 2017.
This slowly increasing or stable interest rate environment should have a positive impact on North American markets. Uncertainty over the direction of interest rates or very large increases in rates would be a negative for markets and neither of those appears to be in the cards over the next 18 months.