The Soaring Loonie and Improving Canadian Economy
To streamline and minimize blog maintenance, I will be discontinuing maintaining the Canadapersonalfinancewebsite.com website (however, I will still hold the domain). I will gradually move all articles from this site to A Dawn Journal. This article originally published on the above website on Oct 15, 2009.
The improving Canadian economy has got a target in its sights as the country moves towards 2010 with its recession seemingly an ever-dimming memory. That target is the US dollar, which is very nearly in reach of parity with its Canadian counterpart. The strengthening loonie is the latest indicator of an improved national economy, and is a source of a great deal of interest at ground level – not least because it may lead Bank of Canada governor Mark Carney to puncture expectations that he will keep the interest rate at a record low level. This may be a good time for anyone considering taking out a loan to take the plunge.
Carney made the commitment earlier in the year to keep the interest rate at a quarter of a percent until the middle of 2010. This commitment was made at a time when the economy desperately required stimulation, and that kind of stimulation seems to have been provided, and boosted the economy to the point where, paradoxically, a lower interest rate may be difficult to sustain, and where a rise in the interest rate in order to stabilise the climb may be necessary. Carney has pointed out that that pledge was specified at the time to be “an expectation” rather than a specific promise.
This speculation has been heightened in the wake of Australia’s Central Bank deciding to increase its interest rates in the wake of successful stimulus spending in their economy. The number of economies announcing positive results in the last few months has led to a note of caution being sounded with regard to over-optimism in the immediate aftermath of a recession. The US dollar is falling against most currencies, and with the loonie having picked up three cents against its American counterpart it means that the two currencies are now close to absolute parity.
Currencies are given to movement of extreme nature, which can cover a long way in a short time, and when momentum gets behind one and against another, there can be extreme financial consequences. Not wanting to be taken by this momentum to a runaway economy, it would make sense for the Bank of Canada to work in the interests of stability by raising interest rates. Though this may not be popular with borrowers, neither is market instability.
Cheap borrowing for those with the means to get it has been one positive aspect of the largely negative global financial crisis. The return to relative normality, or at least the effective end of the global recession, was always going to have an impact on the level of interest rates. Should the loonie hit parity with the US greenback, there would be little problem, but too much of a change too quickly might have results that would be negative for al parties. Paradoxically, higher interest rates may give the currency at least an initial boost, and given that the central bank has made clear its concern that the Canadian dollar may move too quickly, they have a tough decision to make.