Bank of Canada: interest rate to stay at one per cent for ‘period of time’

By Erica Alini - Wednesday, March 6, 2013 at 11:02 AM - 0 Comments

The Bank of Canada kept the key policy rate steady at one per cent today, but pushed the prospect of rising borrowing costs further into the future.

Though the decision to leave the current rate untouched was widely expected, economists had been debating whether the bank would drop its stance that the next rate move would be a hike in light of weak economic growth in the last six months of 2012.

The bank continued to hint a future raise, something it has been signaling since April 2012, but further softened the wording of its warning. ”The considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required,” the BoC said in its policy announcement. In January, the bank had said a hike would be “less imminent,” than earlier anticipated.

The bank said it expects Canadian economic growth to pick up from current depressed levels through 2013, aided by moderate growth in household spending and rising business investment and exports — although the latter are nonetheless expected to remain below pre-recession levels until late 2014. Canadians’ debt-to-income ratio should stabilize around current levels, the bank added.

Looking at conditions abroad, the BoC said it expects growth in the U.S. to be slower than forecast in the near term due to the impact of sweeping spending cuts known as the sequester. Over the next couple of years, though, the pace of economic expansion south of the border remains consistent with previous forecasts, the bank said.

Accelerating growth in China and an expected pick-up in other emerging economies bodes well for global growth, despite the continuing recession in Europe, the bank said.

Will Mark Carney still be the world’s most hawkish dove tomorrow?

By Erica Alini - Tuesday, March 5, 2013 at 12:50 PM - 0 Comments

That the Bank of Canada will keep the overnight rate steady at one per cent tomorrow is a matter of almost scientific certainty. If there’s anything to discuss at all, it’s whether Governor Mark Carney will continue to be the most hawkish of dovish central bankers.

In other words, will the BoC maintain its stance that the next rate move, whenever that may be, will be a raise? The bank has been warning since April of last year that interest rates are headed nowhere but up. The exact words were:

In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 per cent inflation target over the medium term. 

Though the Bank toned down its wording as the economy slowed in the latter part of the year, it has kept some version of that warning in every rate announcement since, alone among major central banks to maintain what monetary policy nerds call “a tightening bias.”

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Federal Reserve to spend $45B a month to buy bonds

By The Associated Press - Wednesday, December 12, 2012 at 12:39 PM - 0 Comments

WASHINGTON – The Federal Reserve will spend $45 billion a month to sustain an aggressive drive to keep long-term interest rates low. And it set a goal of keeping a key short-term rate near zero until unemployment drops below 6.5 per cent.

The policies are intended to help an economy that the Fed says is growing only modestly with 7.7 per cent unemployment in November.

The Fed said in a statement issued Wednesday that it will direct the money into long-term Treasurys to replace an expiring bond-purchase program. The new purchases will expand its investment portfolio, which has reached nearly $3 trillion.
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Mark Carney talks fiscal cliff, Fed policy and housing bubble

By Tamsin McMahon - Tuesday, December 11, 2012 at 5:57 PM - 0 Comments

(Nathan Denette/CP)

In his first public speech after being named head of the Bank of England, Mark Carney, governor of the Bank of Canada, deftly dodged the question of what lesson he might take with him to Europe from his experience shielding Canada from the depths of the global recession. He did, however, give some hints about his approach and touched on a range of other issues, from what the debate over the U.S. fiscal cliff means for Canada, to how we’re not yet out of the woods when it comes to the country’s housing bubble.

Here are a few excerpts from the Q&A that followed Carney’s speech at the CFA Society in Toronto this morning:

On what lessons he plans to take from Canada to the Bank of England:

I think my comments about the Bank of England are best first delivered to the Treasury select committee given their role and we’re working right now with the committee to find a date in the new year that works for both of us.

[That said] there are experiences of crisis management that we had here in Canada. Much is made in Canada that we didn’t have bank failures and we didn’t have other issues. In part, we didn’t have those because we made tough decisions in a timely fashion…The first thing is transparency. You have to level with people on the scale of problems. It does no good to try to spin your way out of a crisis.

…I would say on monetary policy and financial stability policy writ large, I think one the strengths of the Bank of Canada is the breadth and dept of talent in the institution and, as the governor, the importance of listening to diverse points of view and synthesizing within that institutional structure either a path for monetary policy or a path financial reform for other things. Those are some of the aspects that worked here in Canada.

The last thing I would reinforce is basically the power of the flexible inflation targeting framework, which we and many others practices…In order to get the most benefit from that framework,  transparency and communications is absolutely crucial. There’s a way to use communication to potential amplify that power in extraordinary circumstances, which may be appropriate in some jurisdictions, not appropriate in other jurisdictions.

Those are general lesson, which are not necessarily directly applicable to the Bank of England.

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Mark Carney explains central bank speak

By Erica Alini - Tuesday, December 11, 2012 at 2:46 PM - 0 Comments

Mark Carney just spoke at the CFA Society in Toronto. The theme is “guidance,” or how central banks can try to influence investors’ expectations by indicating the likely future movements of interest rates. As the Globe’s Kevin Carmichael noted last week, Carney’s tenure at the Bank has brought about some important changes on guidance. The governor “embraced the academic argument that a little uncertainty could be good for financial stability: a healthy debate about the likely path of interest rates eliminates the risk of a one-way bet, which essentially was the case in the U.S. ahead of the financial crisis.”

Here are some interesting bits from the prepared remarks, which the governor said do not contain any new guidance about the Canadian economy:

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Is the BoC wearing beer goggles?

By Erica Alini - Tuesday, December 4, 2012 at 10:06 AM - 0 Comments

As was unanimously expected, the Bank of Canada is keeping the key interest rate steady at one per cent, it announced today. Not much news there.

More interesting is the discrepancy between the Bank of Canada’s growth projections for late 2012 and early 2013 and almost everyone else’s. Here’s a chart that plots the BoC forecast—as of the October Monetary Policy Report—against those by TD, CIBC, ScotiaBank and BMO:

To be fair, RBC is even more bullish than the BOC. In general, though, the Bank’s projections for the next six months appear to be far more optimistic than the consensus.

The BOC is a well-known bull: it keeps insisting on reminding the market that borrowing costs won’t stay at rock bottom forever, even as other central banks are loath to do so right now. Still, a projected rate of growth of 2.5 per cent between October and December of this year seems exceedingly optimistic after the economy tanked to a dismal 0.6 per cent annualized growth between July and September.

What explains such sunny outlook? In all likelihood, the Bank’s latest forecast is already dated. The text of the interest rate announcement this morning seemed to hint that much when it noted that: “underlying momentum [in the economy] appears slightly softer than previously anticipated.”

The latest available projections from the Bank date back to October. That was before the U.S. presidential election, when most Canadian observers were dismissing the idea that the U.S. might tumble down the fiscal cliff with a confident shrug of the shoulders: “the Americans will sort it out,” was the consensus. A month later, that’s still the consensus—but the continued squabbling in Congress has raised eyebrows among analysts and continues to hold back business investment on both sides of the border.

The MPR was also before eurozone leaders and the IMF delayed granting Greece access to its next tranche of loan money—as if business confidence worldwide need that extra shakeup.

That the BOC’s October forecast already needs an update speaks to how difficult it has become for economists to read the future when the two key risks to the global economy (the eurozone crisis and the fiscal cliff) hinge on closed-door negotiations among politicians.

It’s really about politics, not economics—don’t ask what political scientists’ record is on crystal ball gazing…

Is a rate hike worth the risk?

By Erica Alini - Monday, October 22, 2012 at 3:43 PM - 0 Comments

(Sean Kilpatrick/CP)

What’s there to see in tomorrow’s interest rate announcement by Bank of Canada Governor Mark Carney? More than one might think.

Although the BOC is sure to keep the target for the overnight interest rate at one per cent, where it’s been since September 2010, everyone will be scouring the governor’s prepared remarks looking for something that sounds somewhat like this: “Some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”

That’s a quote from Carney dating back to April 2012. It represented a clear signal to the markets that the Bank was feeling relatively good about Canada’s growth prospects and might hike rates sooner rather than later. Some version of that warning to investors has appeared in every major BOC statement since, but that hawkish tone was nowhere to be found in the governor’s most recent speech, on Oct. 15.

Instead, the governor said the Bank would give ample notice when the moment would come to think about raising interest rates again: “If we were to lean against emerging imbalances in household debt, we would clearly declare we are doing so and indicate how long we expect it would take for inflation to return to the 2 per cent target.” Given last week’s weak inflation numbers, though, it’s anyone’s guess whether tomorrow’s announcement will contain such a reference.

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REVIEW: Volcker: the triumph of persistence

By Andrew Stobo Sniderman - Friday, September 21, 2012 at 11:18 AM - 0 Comments

The saga of Paul Volcker, perhaps America’s lone unsullied statesman of finance and banking, unfolds in three heroic acts. First, he persuaded “Tricky Dick” Nixon to sever the link between the American dollar and gold in 1971, which ushered in the more sustainable (and, yes, often more unstable) world of floating currencies. Second, as chairman of the Federal Reserve, he stared down Jimmy Carter and Ronald Reagan to stop the devastation being wrought by inflation. Volcker was a Democrat, but that didn’t stop him from precipitously raising interest rates (and unemployment) six weeks before the 1980 elections. Sorry, Jimmy, but Volcker took orders from data, not politics. Reagan was happy to win the election with the inadvertent assist, but was rather less pleased when Volcker was similarly implacable for the next six years. Finally, in 2008, Volcker appeared at Barack Obama’s side to help rescue the financial system, with mixed results.

Silber, a professor at New York University, records what Volcker did, but also explains why, drawing on extensive research and 100 hours of interviews with Volcker. Silber does his best to make monetary policy debates seem as dramatic as they were consequential. This leads to some overwrought metaphors (the price of gold serves “as a carbon monoxide detector for inflationary expectations”), but mostly Silber succeeds in evaluating Volcker’s judgments over the years with clarity and without unnecessary reverence for a living legend.

The fear bubble

By Tamsin McMahon - Tuesday, September 4, 2012 at 9:45 AM - 0 Comments

Mark Polott/Getty Images

Earlier this month Louis Moore Bacon, the head of New York hedge fund Moore Capital Management, wrote to his investors offering them a $2-billion refund.

Bacon had made investors a fortune exploiting macroeconomic trends such as interest-rate and currency movements. But these days, he complained, the markets had become far too manipulated by fear for Moore Capital to promise the kind of double-digit returns its investors had come to expect.

Rather than looking for investments that might provide them a nice return, investors were paying big premiums to stash their cash in investments guaranteed to lose money in the long run on the belief that those investments might be the most likely to survive a global financial apocalypse. “Disaster economics, where assets are valued based on their ability to withstand a lurking disaster as opposed to what they may yield or earn, is now the prism through which investors are pricing markets,” Bacon wrote to clients. In this environment, his fund simply couldn’t make money.

Bacon is not the first multi-billion-dollar hedge fund manager to return money to clients or complain that the aftermath of the 2008 financial crisis has created a new era in investing where the old rules no longer apply. A growing chorus of doom-and-gloom types believe the financial markets that have served generations of investors so well for the past 100 or so years may finally be irreparably broken.

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When banks are too big to behave

By Tamsin McMahon - Friday, July 13, 2012 at 10:15 AM - 0 Comments

Olivia Harris/Reuters

As long as there have been banks, there have been banking scandals. The treasurers of Athena burned the Acropolis in an attempted cover-up after secretly lending money to speculative bankers. Wall Street’s first banking scandal—a familiar tale of banks lending too heavily to property speculators who lost it all when the real estate bubble burst—happened in 1837. Banking that breaks the rules “in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous and frequently fatal to the banking company which attempts it,” economist Adam Smith warned in The Wealth of Nations nearly 250 years ago.

With that history, it’s understandable that economists don’t quite believe promises by U.K. regulators that the latest scandal to rock the global financial industry—revelations that banks were manipulating a key interest rate affecting more than $300 trillion in worldwide investments—will usher in a new era of ethical banking. “It’s guaranteed to be a losing battle,” says Richard Grossman, an economist at Wesleyan University and author of Unsettled Account: The Evolution of Banking in the Industrialized World since 1800. “The incentives in banking are so strong and the money is so big. As soon as you close off one area, someone is going to think of a new way to do things.”

Related: 

• The LIBOR scandal: Why manipulating prices is easier in the financial industry

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The LIBOR scandal: Why manipulating prices is easier in the financial industry

By Andrew Hepburn - Friday, July 13, 2012 at 9:00 AM - 0 Comments

Barclays bank former Chief Executive Bob Diamond. (Luke MacGregor/Reuters)

Andrew Hepburn is a former hedge fund researcher. He writes on commodities, the stock market and the financial industry–but without the jargon.

Is there an epidemic of price-fixing and market manipulation? Recent headlines certainly raise the question.

On June 28, Britain’s Barclays Bank agreed to pay over $450 million to settle allegations that it attempted to manipulate the London Inter-Bank Offered Rate (LIBOR), a crucial global interest rate. LIBOR is (supposedly) the rate at which banks can borrow funds from other banks. It is a key measure of stress in financial markets: When banks start getting nervous about lending to each other (therefore charging one another higher interest rates), it’s a sure sign we’re all in trouble. LIBOR is used as a benchmark for interest rates the world over and affects everything from student loans to mortgage payments. And LIBOR is not an ordinary rate: It is calculated based on the daily submissions of up to 18 global banks, depending on the currency in question (rates are published for 10 different currencies).

Barclays attempted to manipulate LIBOR both to give a false impression of the bank’s health and also to benefit its trading positions. It did not do so alone: traders coordinated their activities with other banks to ensure successful manipulations. For example, let’s say Barclays had accumulated bets that interest rates would rise. Submitting artificially high estimates of how much it cost the bank to borrow funds would tend to push the published LIBOR rate higher, thus benefitting its trading positions. To do so, however, it would need to collude with other banks, because the highest and lowest submissions are automatically excluded in the calculation of LIBOR.

The LIBOR scandal by itself is shocking, but there are other recent examples of outrageous (alleged) manipulation. On July 2, a former trader for Glencore International, the world’s largest commodities company, sued rival Louis Dreyfus Commodities for allegedly causing an artificial spike in the price of cotton. The alleged scam cost Glencore over $300 million and the trader in question was fired.

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ING Direct scrambles to reinvent itself

By Tamsin McMahon - Thursday, May 24, 2012 at 9:07 AM - 0 Comments

Photograph by Andrew Tolson

When ING Direct set up shop in Canada 15 years ago, it offered customers what was then a radical proposition: jettison the bricks-and-mortar world of retail branches for the new frontier of Internet banking. At the time, online-only banking was so alien a concept in Canada that the company, headquartered in the Netherlands, heralded its arrival by advertising itself as unabashedly foreign, hiring a Dutch actor to coax Canadians in his thick accent to “save your money.”

Canada was the first test market for ING’s direct banking business—the term for banks that don’t have branches—and its main attraction was savings accounts that offered rates well above the major banks, which ING could afford because it didn’t have to build and staff a branch network. It was an appealing prospect for Canadians who remembered the days of savings accounts that paid seven and eight per cent and were fed up that rates among the big banks had fallen so far. The high-interest savings account, which ING followed with discounted mortgages, helped attract nearly two million Canadian customers to the upstart bank, a successful test launch for what would eventually become the world’s largest online bank.

But that was the late 1990s. Banking in Canada today is a world apart from the staid atmosphere that ING sought to shake up with its arrival. The country is now home to a dozen direct banks operated by everyone from Manulife to President’s Choice, all offering their own version of high-interest savings accounts. Even Canadian Tire offers customers a chance to earn interest on their money.

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OECD urges Bank of Canada to raise interest rates

By Alex Ballingall - Tuesday, May 22, 2012 at 9:48 AM - 0 Comments

Canada should raise interest rates to curb inflation and cool the housing market, according to the Organization for Economic Cooperation and Development. As the Globe and Mail reports, the Paris-based group’s policy advice will stoke the already heated debate in Canada over whether the central bank’s decision to keep interest rates at record lows is causing a housing bubble in the country.

The OECD says the Bank of Canada should raise the benchmark rate by 1.25 per cent between this fall and the end of 2013. That would leave the overnight rate at 2.25 per cent.

Although that would keep the interest rate at a near-historic low, it would create an unprecedented spread between the Canadian and American rates, which would put upward pressure on an already-valuable loonie.

Bank of Canada Governor Mark Carney has resisted pressure to raise the benchmark rate because of concerns about the overall fragility of the economy. Also Tuesday, the OECD warned that the ongoing eurozone debt crisis poses the greatest risk to global economic recovery, especially as efforts to balance budgets through austerity appear to be losing popularity in countries like Greece, Germany and France.

“Elections in a number of euro area countries have signalled that reform fatigue is increasing and tolerance for fiscal adjustment may be reaching a limit,” said OECD chief economist Pier Carlo Padoan, quoted by the AFP. Padoan added that “rising unemployment and social pain may spark political contagion and adverse market reaction” in countries outside the 17-member eurozone.

Canada’s lower-than-expected GDP growth could change Mark Carney’s mind about hiking interest rates

By Gabriela Perdomo - Tuesday, May 1, 2012 at 10:34 AM - 0 Comments

As news came in yesterday that Canada’s economy shrank by 0.2 per cent on account of slow mining and manufacturing output, the Loonie took a hit, “trading 46 basis points lower than Friday’s close at US$1.0148,” according to the Financial Post.

Something else was affected, too: the prospect of Bank of Canada head Mark Carney rising interest rates this summer to control a growing appetite for debt—which he sees as the biggest threat to Canada’s economy.

From the Globe:

A surprise dip in gross domestic product suggests the economy has less strength than Bank of Canada policy makers had thought, reducing market expectations for a summer interest-rate hike.

Although, it doesn’t mean it’s guaranteed that rates won’t go up this year. Quoting Doug Porter, deputy chief economist at BMO Nesbitt Burns, the Globe continues:

“The Bank has sent a pretty strong message that they’re not comfortable with rates at current levels,” he said, “so they just need to be convinced that this was a one-month wonder and that the economy is back onto a 2-per-cent-plus growth track, to get them hiking.”

What happens to a $300,000 mortgage if interest rates go up by 1.5 per cent?

By Erica Alini - Thursday, April 19, 2012 at 2:52 PM - 0 Comments

The Bank of Canada announced on Tuesday it’s going to leave the key interest rate at one per cent. No big surprise there. But the Bank was sounding more optimistic than it has been recently on the state of the Canadian economy–hinting that rates may start climbing soon. Now, governor Mark Carney has sounded hawkish before and then held off. As CIBC wrote in a note to clients:

“It’s déjà vu all over again … recall that in mid-2011, Governor Carney’s team was even more convinced that the need to tighten policy was at hand … but an economic bump in the road waylaid those plans, including a [...] drop in Canadian GDP and the subsequent eurozone crisis.”

The Bank may well hit a similar bump again this year, with Europe struggling with gaping budget holes again and the U.S. recovery wobbling. So if you want to shrug it all off and keep wallowing in cheap credit, you can quote the pros.

BUT whenever the Bank does kick off the tightening–and the time will come, eventually–it will have a long way to catch up. A recent report by the Conference Board of Canada estimates that, based on the pace of the Canadian economy (and ignoring factors that are constraining our maneuvering space on monetary policy, such as the situation in Europe and the Fed’s interest rate target), our key interest rate right now should be 2.5 per cent. Imagine that.

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Household debt and the Bank of Canada’s anxiety levels—in a graph

By Erica Alini - Wednesday, April 11, 2012 at 3:03 PM - 0 Comments

It’s been years since Bank of Canada governor Mark Carney first started warning about Canadians piling on too much personal debt. Rising household debt, after all, has been the most dangerous byproduct of his low interest rate policy, which was initially designed to help Canada sprint out of the Great Recession––and, later on, partly dictated by the need to help sputtering Canuck exports. Right from the get-go, though, Canadians haven’t been listening. As the situation became more dire, so did the Bank’s warnings. Today Canada’s ratio of household debt compared to disposable income is inching toward 160 per cent, the peak seen in the U.S. and the U.K. just before their respective housing busts. (In the last three months of 2011, the debt-to-income ratio declined somewhat–not because Canadians stopped taking on debt, but because income levels also rose during the same period.) Carney is still at it. Last week, he finally raised the prospect of raising interest rates, cutting people off from all that cheap money, even as the Fed down south sticks to near-zero rates.

In the graph below, we’ve charted debt-to-income ratios, alongside some increasingly alarmed quotes from BOC governor Mark Carney or other Bank officials.

Click on the chart to open a full-size version of the graph in a new window.

Source: Statistics Canada. Photograph: Sean Kilpatrick/CP.

Bank of Canada singles out household debt as ‘biggest domestic risk’

By Erica Alini - Thursday, March 8, 2012 at 11:02 AM - 0 Comments

The Bank of Canada thinks interest rates are fine where they are, at least for now. It announced today that it will hold the key rate at one per cent, where it’s been since September 2010, and didn’t discuss possible hikes. Those accustomed to the central bank’s penchant for dulling the news got the message: ”the Bank is a bit less dovish,” reads a CIBC note, which predicts that “markets will pick up on the slightly improved change in tone on the economy, and might move forward the implied date for the first rate hike.”

The bank, in fact, said it believes the Europeans will manage their public debt mess without bringing down the system, and that the Canadian economic outlook has ”marginally improved,” in part because the U.S.  is doing a little better.

But another big reason to believe Mark Carney may be closer to a rate hike than previously thought, is the bank’s statement about Canadian wallets:

Canadian household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk. 

As Tamsin McMahon wrote a couple of weeks ago in Maclean’s, Canadians owe an average of $1.53 for every dollar they earn–just below where American debt stood when housemageddon hit south of the border. And there’s little question that record-low interest rate have encouraged Canadian borrowing, much as they did in the U.S. under Alan Greenspan, who is widely blamed for bringing America from the dot-com bust to the housing crisis. Up here, though, it’s hard to point the finger against Carney, whose hands are tied by a lucklustre global economy, the Fed’s decision to keep U.S. rates low through 2014, and rising commodity prices, which are already pushing up the loonie and hurting exports and the manufacturing sector.

Still, the bank sounded an upbeat note—and that may indicate that the rate hike the housing sector very much needs may be closer than we dared hope for.

And I was “irresponsible” and “misinformed” how?

By Jason Kirby - Friday, September 30, 2011 at 4:24 PM - 11 Comments

In attacking my recent story What’s the Use of Saving Money? as “irresponsible” and “misinformed,” I’m not entirely sure Peter Aceto, the CEO of ING Direct Canada, read beyond the headline. If he did, he’d know it wasn’t a piece that “discourages Canadians from using savings accounts.”  Quite the opposite. While bemoaning and exploring the demise of the saving culture in this country, our story argued that around the world people are being discouraged from putting away their pennies by ultra-low interest rates and government programs that promote spending (Cash for clunkers, home reno rebates etc).

I won’t go over the content of the original story. I’m confident readers understood it simply aimed to give a voice to the frugal few and their frustration that low rates subsidize borrowers while hurting savers.

The main thrust of Mr. Aceto’s indignant letter is that Canadians who don’t want to buy a house or invest in the stock market have a choice—they can open an ING Direct savings account. It’s true that until ING came along, there were few options for Canadians to earn decent guaranteed rate on their deposits. ING popularized at least the idea of saving with that Dutch bloke and his accented “Save your money” catchphrase. ING pays 1.5 per cent with its standard high-interest savings account. Ally Financial, which in a past life was the financing arm of General Motors until a bailout came and washed away all its problems, offers 2 percent to its clients. (You can earn more with both if you put the money into longer-term GICs.—five-year GICs pay 2.5 per cent at ING and 2.75 per cent at Ally.)

That’s great, but in the year since ING raised its savings rate from 1.3 per cent to 1.5 per cent, there have been seven months where year-over-year increases in the Bank of Canada’s core consumer price index exceeded that rate. The core rate also excludes eight of the most volatile components (fruit, fruit preparations and nuts; vegetables and vegetable preparations; mortgage interest cost; natural gas; fuel oil and other fuels; gasoline; inter-city transportation; and tobacco products and smokers’ supplies). Excluding those items helps the Bank better determine the long term trend of inflation, but they’re still products Canadians buy and must pay more for. Much more in some cases. According to Statistics Canada, in August food prices were up 4.4 per cent.

Contrary to what Mr. Aceto claims, I didn’t say Canadians should be investing rather than saving. I made no suggestions whatsoever for what Canadians should do with their money, because there is no easy answer. The housing market looks like it’s in a bubble, the stock market is terrifyingly volatile, and savings accounts are not keeping pace with inflation. That’s just the sad reality for savers today. And it’s why many more savers are likely to throw up their hands and ask “What’s the point?” For the record, and for Mr. Aceto, I believe that’s a bad thing.

Here are some more thoughts on the topic from south of the border. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, is retiring tomorrow and takes a parting shot at ultra-low interest rates:

“What you do when you artificially hold rates down is ask the savers to subsidize the debtors. In an emergency and a crisis that is justifiable, perhaps,” he said.

But to do it repeatedly and indefinitely risks distortions in the market and creating unintended consequences and eventually inflation, he warns.

“It would be better if we were not as accommodative so the market could function and send out proper signals,” Hoenig said. “I think interest rates would be low. I just don’t know how low.”

Before I finish I want to also take an opportunity to thank Garth Turner, the former MP and financial commentator for his help rustling up folks for us to talk to for our original story. After I asked Garth if he knew anyone who felt like a chump for being prudent in the face of all the incentives to borrow and spend, he put out the call on his popular www.greaterfool.ca site and sent me dozens of emails from people who responded to his message. The request clearly hit a nerve.

Central bank battle

By Jason Kirby - Thursday, July 21, 2011 at 12:00 PM - 0 Comments

Cheap money pumped out by central banks has sparked a speculative frenzy in the commodity sector that has driven up prices for everything from gasoline to Corn Flakes.

Or it hasn’t, depending on who you ask.

It’s become one of the most critical economic debates facing the world, and it’s pitted the Bank of Canada against Japan’s own central bank. Last week, a BoC study concluded “financial speculation seems to have played a modest role” in rising commodity prices,” and that “the available evidence points to global demand and supply conditions” as the real cause. That’s in contrast to a report published three months ago by the Bank of Japan. While demand from emerging economies has driven prices, the BoJ admitted, “speculative investment flows…have amplified the intensity of the price surge.” And the jump in speculative money can be tied directly to lax monetary policies, it said.

Maybe the faceoff simply comes down to perspective. Resource-rich Canada will benefit enormously if the rise of commodities is in fact due to a permanent shift in demand. With almost no resources of its own, Japan can only hope that as central banks tighten the reins, speculators abandon their bets on commodities, and prices finally fall back to Earth.

Bank of Canada holds interest rate at one per cent

By macleans.ca - Tuesday, July 19, 2011 at 12:19 PM - 5 Comments

The Bank of Canada has decided to keep the country’s overnight interest rate steady on Tuesday, citing economic uncertainty in the U.S. and Europe. Canada’s key interest rate will remain at the record low of one per cent. Economists had been split in their predictions of what central bank governor Mark Carney would do with the overnight borrowing rate. Many thought the bank would boost the rate in July because of rising household debt and inflation. But in a statement on Tuesday, the bank said the debt crises in the U.S. and Europe create an uncertain international economic situation that could affect Canada. In response to the bank’s decision, the loonie jumped to $1.053 U.S. by mid-morning Tuesday.

CBC News 

Bank of Canada holds steady on interest rate

By macleans.ca - Tuesday, May 31, 2011 at 11:57 AM - 0 Comments

Canada’s central bank announced on Tuesday that it would keep the country’s interest rate at one per cent, holding the lending rate steady for the sixth time in a row. According to numbers released last week by Statistics Canada, the Canadian economy didn’t meet its growth expectations during the first quarter of the year, expanding at an annual rate of 3.9 per cent. The Bank of Canada also said that, while they are opting to keep the interest rate steady, policymakers should be wary of inflation, which occurs as a result of having a low benchmark-lending rate. As the expected economic recovery moves forward, economists from Scotiabank are expecting the central bank to raise the interest rate, which has been held at one per cent since September 2010.

CBC News

Why you shouldn’t be loyal to your bank

By Erica Alini - Wednesday, May 11, 2011 at 2:03 PM - 18 Comments

When it comes to your relationship with your bank, you should be flirtatious. That’s the takeaway from a recent report by the Bank of Canada, which concludes that “loyal consumers pay more” when negotiating a mortgage rate with their bank. If you have three or more products with the same bank (such as a bank account, credit card and insurance), the bank “interprets your loyalty as reason to believe you are less likely to shop around, making you less price sensitive,” writes RateHub, a Toronto real estate startup that noticed the report.

The Bank of Canada’s study found that new clients receive a rate discount of 0.1 per cent more than existing clients. Based on the average value of Canadian homes on the market, which is currently around $370,000, that translates into savings of about $6,000 on a 25-year mortgage at a 4 per cent rate. It’s a substantial price to pay for loyalty.

This week: Good news, bad news

By macleans.ca - Friday, April 15, 2011 at 10:40 AM - 0 Comments

Good news

Andy Clark/Reuters

Vive la France!

France played a crucial role this week in the surrender and arrest of the Ivory Coast’s defeated president Laurent Gbagbo and his militiamen. With its troops on the ground, France has publicly pledged to help the troubled nation in its reconstruction. Along with its recent calls for greater NATO involvement in Libya, France has suddenly become a robust player on the international stage, flexing its muscle in the name of democracy and global stability. It’s just too bad that same spirit isn’t on display back home, where French police arrested two women under the ban on wearing face-concealing veils in public.

In the classroom

The organization that regulates Ontario’s 230,000 teachers issued a new rule this week: no more connecting with students on social media. Teachers have been warned not to “friend” their pupils on Facebook, subscribe to their Twitter accounts, or use Flickr, LinkedIn or MySpace to interact online. Give the College of Teachers an A+ on this. The student-teacher relationship belongs in a classroom, not a chat room.

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Policy alert

By Aaron Wherry - Tuesday, March 29, 2011 at 1:42 PM - 53 Comments

Jack Layton promises a cap on credit card rates.

The first policy announcement from the NDP campaign would allow the federal government to regulate credit card interest rates so that they could not be any higher than five points above the prime rate, which the Bank of Canada has currently set at three per cent. That would mean credit card companies could not charge more than eight per cent interest on the monthly bill — the same idea the NDP put forward on the 2008 campaign trail and then introduced in a private member’s bill last year.