Leslie Penny Blog
Earlier this week the Federal Government presented its budget for 2011 and it looks like we will be gearing up for a spring election (please refer to Spring Election? on Propertywire.ca for further insight). The leaders of the opposition parties weren’t supportive of Harper’s budget and are gearing up to overtake his Government.
Fiscal policy is a key factor in an economy, and Federal budgets are a big part of it. When you take political instability into consideration (in this case the possibility of another government leading the country), the chances of the central bank playing with interest rates is slim. With an election looming, there’s pretty much little chance of a hike to the benchmark overnight rate in the second quarter, let alone April.
Basically, the uncertainty in the short-term policy has increased and therefore we don’t expect much movement in terms of interest rates.
Also, if history is an indicator, over the last couple of decades the Bank of Canada has chosen not to tighten during the time surrounding an election. The only exception was in 1997 when rates increased just 24 days after an election in early June. However, at that time a stronger global economy existed and allowed the central bank the flexibility to increase rates.
With an election coming in mid-spring, we can pretty much rule out an interest rate hike during the upcoming quarter. Then by the time the new government takes office and prepares its own budget, it may be later in the year before we see the Bank of Canada in a position comfortable enough to start moving rates.
According to Avery Shenfeld, Chief Economist at CIBC World Markets, he also predicts that the Canadian dollar should stay firm and with softer core inflation and a somewhat higher rate of employment, Mr. Carney may be a little more optimistic concerning economic growth.
However, Scotiabank economist Derek Holt believes that interest rates won’t start to move until sometime in the fall of 2011.
This is great news for anyone with a variable/adjustable mortgage. Especially with tax refunds on the way, it’s an opportune time to take advantage of prepayment options and pay more towards the principal, knock years off your mortgage, and save thousands in interest – without it affecting your day-to-day cash flow.
Now we just have to wait and see who comes out on top of the polls on May 2.
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