Canadian Personal Finance Blog

Archive for the ‘Bank Rates’ Category

It seems the Canadian Dollar is again rocketing up in value compared to it’s anemic continent-mate the once mighty U.S. Dollar, which could mean many different things to we Canadians such as:

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).

So I really was going to write something on Wednesday before I got the Blue Screen of Death from Vista, which will now cause me to do a full backup of my system and possibly replacing a few things that I suspect might be part of the issue, but that is not the subject of today’s post.

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?

Rates Remain the Same

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.

Thursday caused the world to stop worrying about the Financial Apocalypse and start worrying about the demise of their Celebrity Aristocracy with the deaths of Ed McMahon, Farrah Fawcett and finally Michael Jackson.  I remember seeing Farrah Fawcett on the wall of most boys my age bedroom, and hearing her passing makes me feel a little older.

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.

No LCBO Strike

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.