No Rate Hikes

So the Bank of Canada kept their overnight target rate at 1/4 per cent for March, giving us all cheap money for a little while longer. Rememmber that the C.D. Howe institute last week urged the bank to go Harder, Faster with their rate increases, but the bank is holding off for now.

The telling phrase to read in this report is:

“…Conditional on the current outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target….”

So the end of the second quarter, or say the June/July time frame, money is going to start getting tighter, which could make for an interesting summer.

Time to start planning on how you are dealing with your debt (if you have it) with a higher interest rate, or what to do about your Bonds, given interest rates will go up.

Federal Budget Looms

I suppose Larry MacDonald will again be locked in a large room with a bunch of other “sweaty” financial newspaper types in preparation for the Federal Budget scheduled for March 4th. Larry always has interesting stories about what really goes on in that room, while all these “touts” pour over the budget to boil the essence of it down to a 1 minute blurb on TV or 750 words or less for the papers.

Hopefully we shall move back to a more balanced budget and maybe put together a plan to start paying off the national debt (again), but stay tuned, I am sure there will be something exciting on Thursday.

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Harder Faster

That is actually one of my favorite April Wine albums, but unfortunately it is also the message the C.D. Howe Institute is pushing for Interest Rate increases this year in their report How Soon? How Fast? Interest Rates and Other Monetary Policy Decisions in 2010.

The report itself is a very interesting read on how and why things have happened in terms of credit and interest rates, however, there is a nasty little recommendation that is in it:

When the overnight rate does begin to rise, the changes must be as aggressive as the rate cuts of 2008 and 2009 with increases of 50 basis points at every announcement date until mid-2011 not seeming unrealistic.

Remember how quick and dramatic the rate cuts were last year? There may be an equal and opposite reaction in terms of speed and rate increase this summer and into 2011, which will cause a tightening of credit and tumult in the bond markets too.

Were you planning on renewing your mortgage, or getting a new one? Might be time to lock into whatever rate you can find now, if you need to, since it seems we are in for a bumpier ride in the interest rate world.

And The Winners Are

Yes there were 10’s of entrants to get the free copies of Quicktax, and the winners are:

• • • 2Hirondelles, who was selected by my son from my lucky Pittsburgh Steelers hat.
    • JohnnyG, who was selected by my wife from that same lucky hat!

I will be contacting you via e-mail on how you would like to receive your free software. Congrats to all entrants.

There will be more giveaways soon (as soon as someone gives me more stuff to give away).

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This is getting a little repetitive but Bank of Canada’s key overnight rate remains at 1/4% unchanged again this month. The overall Bank Rate remains at 1/2% as well, which means cheap money continues in the market place.

The statement from the bank is mostly that the recovery continues and we should be out of this whole mess some time near the end of 2010 or the beginning of 2011, but the important line to read is:

Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.

The end of the second quarter is June, which means interest rates will be going up this year, and you are running out of time to take advantage of these cheap rates to pay down your debt (assuming you are not paying Credit Card debt, in which case, this has no effect on you). If you have a variable rate mortgage can you lock in, or has the bank already altered it’s rates so that locking in might not be as attractive now?

Remember if the bank raises interest rates to say 2.5% somewhere along the line, that is a huge percentage increase compared to where they are right now.

CPI Numbers Today Too

To confirm the Bank of Canada’s inflation statement, Stats Canada will be posting the CPI numbers for the end of 2009, which should be a very interesting statement. With gas prices inching their way back to $1 per liter, I suspect inflation is back it’s just how bad is the question.

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In Canada, as expected, the composition of aggregate demand is shifting towards final domestic demand and away from net exports. In the third quarter, the balance of these shifts resulted in weaker-than-projected GDP growth. Core inflation in recent months has been slightly higher than the Bank had projected, although total CPI inflation remains close to projections.

So you can read between the lines that inflation is starting to worry the bank a little, but for now they are not willing to turn up rates to maybe combat it before it gets rolling. If fuel prices remain low, inflation may remain under control, but if there is a spike then we may see big interest jumps in reaction to this sooner than June of 2010.

My advice to those who ask continues to be, take advantage of these low rates to PAY OFF debt, not get more debt. If you can afford to make over payments on your debt vehicles, do so, you get more bang for your buck, and you’ll get better pay back than most things you might invest in, these days as well.

TD Rates Up

TD followed through with there promise to screw up my Secured Line of Credit making it a “Prime” (their definition of it, not the Bank of Canada’s) plus 1.0% rate, instead of the “Prime” + 0.5% that it has been for the past 8 years (dating back to my days with Canada Trust). The explanation for this increase was very suspect (in my opinion), claiming that the borrowing markets are tight and it is much harder for the bank to borrow money. What does this have to do with an existing loan that they underwrite?

I think I would respect more a statement like, “See if you can find a lower rate somewhere else, we dare you!”. That kind of statement makes much more sense to me.

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Rates Don’t Rise

So we continue to live in a creditors Utopia with the Bank of Canada keeping their key overnight rate at 1/2% for now.

Those who carry debt are now dancing in the streets, knowing that their debt rate will not go up (the Government might be one of those debtors who are celebrating too).

Interestingly the banks are starting to raise their mortgage rates for longer term Mortgages, which suggests the banks think the interest rates may start going up some time soon, or they figure they can make money off folks by raising their rates?

The Bank of Canada’s statement was:

So these rates will continue until mid-year next year? Good to know, guess I should dump my Bond Mutual Fund in March of next year then? Good to keep that in mind too.

Living La Vida Loca de Deuda

To paraphrase Mr. Ricky Martin, let us not all continue to live the Crazy Debt Life, let us take advantage of this break in interest rates to pay off our debts and get our Personal Finance life back into an orderly state.

Yes, for every $50 extra you pay off on your debt at this low rate you may only see $2 pay back for the year (assuming a 4% rate), however if rates double (or more) in the next 2 years, what then? Kill the debt demon while it is weak, if you wait too long it might find more strength!

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1. We need bigger wallets because our money is worth so much more, OK, that is a joke, however, Canadians traveling to the U.S. or buying U.S. securities are getting “deals” now due to the Canadian Dollar being so high in value. Maybe it’s time to think about buying some American assets? How about going to the states and buying your snow tires down there, might be cheaper too!
2. Canadian Workers now are no longer just lazy and shiftless, we are bloody expensive too. Again, a weak attempt at humor, but it is very bad news for Canadian Firms attempting to sell either their services or their products into the U.S., as now our products have increased in value, without us doing anything.
3. The Canadian Dollar might become the “World Standard” for money, yes, another weak attempt at humor, the Euro is more likely to take that mantle away from the U.S. greenback very soon (if not the Chinese Yuan).
4. Given our dollar is only worth 0.65 of a Euro and 0.61 of a Pound Sterling maybe we shouldn’t worry so much? That’s a naive answer, our biggest trading partner is the U.S. and if they stop buying our stuff, it is going to hurt, but luckily some of the stuff they buy they really need, like Oil. Given oil prices have dropped, not as much, but our American Cousins are still addicted to Crude and we are their major pushers right now.

Does this mean the Canadian economy is so much stronger than the American? Um, no, it means the U.S. economy is in bad shape, but it can easily drag Canada down as well, so it behooves us to help our U.S. comrades to get out of this Economic Funk and get back to their free spending ways (and of course Buy Canadian!).

Conclusions?

Before the Loonie drops again, maybe whip across the border and pick up:

• Snow Tires
• Some electronics stuf
• Clothes
• A Whole Market ETF

and of course remember to declare it all at the border (and remember to bring your passport too).

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Bank Fees as Simple Interest

I mulled over an idea I had about if banks had to tell you what their service charges were as an interest rate whether folks might get a little bit more upset about how much they are being gouged.

Right now Bank Fees are quoted as a dollar value like $12.95 for our Extra Special Banking Service, etc., etc., however what if we do a little simple arithmetic (Michael James could do the more interesting compound interest version of this equation)?

Assume that over a year you hold a balance of about $500 in your chequing account (which is where you do most of your banking). Let us also assume that you get paid no interest on your balance (that is no stretch right now), but you get charged $12.95 a month for the Extra Special Banking Service offered by Leech Banks.

Let’s wander through the calculations:

• If you pay $12.95 a month in service fees (excluding other fees for cheque printing, non-bank ATM withdrawals, etc., etc., etc.,) that adds up to $155.40 in a year for service charges.
• Assuming we keep the balance in our chequing account at $500.00
• If you use a simple interest model (compounded once a year), you then have paid a 31.08% simple interest charge for this service.

Think about the number you just saw, you lost over 31% of your principle due to your bank withdrawing service charges. This value would be higher if you had a monthly compounding period (I think). If you carried more money in your account this might be a lower rate (in my bank if I hold over $3000 in my chequing account I then don’t pay at all), but if you kept a lower principle the rate would even be more astronomical (if you held a balance of less than $200 it would in fact be closer to a 100% simple interest charge).

Would you use a bank that gave you -31% interest on your chequing account? Would you go anywhere near a bank that advertised that service?

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To no ones surprise the key overnight rate from the Bank of Canada was kept at the ludicrously low rate of 0.25% today.

The reasons behind this decision are:

The dynamics of the recovery in Canada remain broadly consistent with the Bank’s medium-term outlook in its April Monetary Policy Report (MPR). Stimulative monetary and fiscal policies, improved financial conditions, firmer commodity prices, and a rebound in business and consumer confidence are spurring domestic demand growth. However, the higher Canadian dollar, as well as ongoing restructuring in key industrial sectors, is significantly moderating the pace of overall growth.

Some of the early strength in domestic demand represents a bringing forward of household expenditures, which modestly alters the profile of growth over the projection period relative to the April MPR. The Bank projects that the economy will contract by 2.3 per cent in 2009 and then grow by 3.0 per cent in 2010 and 3.5 per cent in 2011, reaching production capacity in the middle of 2011.

Total CPI inflation declined to -0.3 per cent in June and should trough in the third quarter of this year before returning to the 2 per cent target in the second quarter of 2011 as aggregate supply and demand return to balance. Core inflation held up at 1.9 per cent in the second quarter of 2009. The Bank still expects core inflation to diminish in the second half of this year before gradually returning to 2 per cent in the second quarter of 2011.

OK guys, don’t give yourself whiplash patting yourselves on the back. Low rates have meant continued consumer spending, and yes inflation is low, but the fact the economy is going to shrink this year and allegedly will grow next year is hardly reason to celebrate. What happens with this recovery, inflation, maybe?

CPI Tachometer

CPI Tachometer

For those of you who have not checked out the Bank of Canada’s web site, they have some amazing graphics and this one is the one to look at if you are worried about interest rates. This shows that inflation in the eyes of the bank is very low and thus they are very unlikely to raise interest rates because of inflation (they may raise them for other reasons but it will not be for this exact reason). For those of you who keep asking me, “… will interest rates go up?”, watch this graphic.

Other Useful Graphs from the Bank of Canada

Interest Rates Via Step Graph

Overnight Rate Tach

I am a very visual learner and sometimes it really doesn’t strike me just how low interest rates have dropped over the past few years, so here is a very useful graph from the Bank of Canada illustrating the overnight rate since the beginning of this century, it is quite startling to see it has just gone down the whole time.

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When celebrities die, does that change the economic climate? Hey anything is possible in this day and age, maybe we will see the Michael Jackson recovery?

The Poster

In the Financial Blogs This Week

With the summer coming is there an economic malaise about to fall? We shall see:

• The Canadian Capitalist points out that Borrowing Costs are Going up even though interest rates are staying the same.  Time to buy Bank Stocks again?
• Michael James points out Grocery Bag Lessons in Economic Incentives, and now he is a bring your own bag man.
• Preet at WhereDoesAllMyMoneyGo is pushing a Great Father’s Day Gift (OK I’d like to get it, but I am not entering as I feel there is a conflict of interest), if you want to go fast, go check this out.
• Four Pillars points out How to Use Aeroplan points, always useful to read case studies for services I use.
• Larry MacDonald wrote about how the Media’s Influence on the Stock Market, you’ve got to admit the media does swing things some times.
• Gail Vaz Oxlade asks How Do You Track Your Money, which is always a topic I love to talk about, although Gail’s method is a bit higher work than I’d do.
• The Canadian Tax Resource gives you 5 Tips to Pay Off Your Mortgage, which is always useful.

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The LCBO and their union decided not to turn off the liquor spigot, and thus the mad rush on Tuesday simply meant that the shelves on Wednesday needed a lot of restocking (and lots of profits for the LCBO as well). For those who rushed out, guess you can have a BIG party for Canada Day, or you can keep your stockpile, for another holiday? There is a tentative deal in place and now we can all look forward to a boozy summer (whoo hoo!).

Unfortunately for Toronto their strike continues on and their garbage continues to stack up. With the heat this week, might make for some very aromatic issues in Toronto.

U.S. Interest Rates Stay the Same

Interest rates in the U.S. will stay the same for now, said the Federal Reserve on Wednesday.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

Good to hear, but energy prices going back up is going to whiplash on food prices as well, so inflation being low may be wishful thinking on their part.

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