Is a Prime Rate Cut Coming in 2014?

The Bank of Canada in early February left interest rates the same as they’ve been for months, but does this mean a prime rate cut is in our future? Keeping interest rates stable is important, but lower interest rates could spur consumer confidence, couldn’t it? It’s just one of those things where the Bank of Canada keeps saying they’re going to up rates, industry insiders pine away, hoping against hope that they’re going to drop them down and everyone else ends up trapped in the middle. So is another prime rate cut coming in the near future or are some insiders dreaming?

Household and Government Spending Dropped

In the last year household and government spending dropped, which may not create the conditions to precipitate a prime rate cut. Inflation remains in check, sticking at around .8% over the last twelve months (according to Statistics Canada). The government cut its spending , households are minding their budgets more and not looking to expensive and luxury purchases (even housing has hit a slump in the last 12 months, but beginning to surge in January with a flood of new buyers).

Household credit has expanded at a rate of 3% a year, which pales in comparison of the heydays of 10% a year. Could this be the reason that there is a prime rate cut coming in the future? Probably not – lower spending levels mean less consumer confidence, which in turn leaves more and more consumers not really looking to extend lines of credit. Even businesses are spending less.

GDP Growth Estimates Fell

The Bank of Canada cut its forecast for Euro, US and Canadian GDP growth, meaning that while growth isn’t as bullish as many might hope, it’s not that bad. If anything Canada should be happy it’s not trapped in the Eurozone’s negative cycle of growth (down a whopping -.30% when it started off at .40%. Maybe it’s austerity, maybe it’s just a run of bad luck, who knows.

While global risks have diminished, the chance for another major economic downturn is quite slim. Interest rates won’t need to plummet without a good reason; if growth estimates were overshot by the Bank of Canada, more consumers, businesses and even the Canadian government have lowered their spending, there probably won’t be a big rate fall again in the near future.

Rates Probably Won’t Fall Again in the Near Future

The Bank of Canada has been saying for years that they’re going to hike interest rates, but it never comes to pass. It runs in tandem with US interest rates and most forecasters agree they’re not going to hike any time soon. It’s important to note that while there is a slim chance of a rate hike in the next 18 to 24 months, it will probably be a 1% bump at most, keeping inflation in check. While no one can predict the future, I predict that those pointing to a prime rate Armageddon are a bit off the mark.

Homebase Mortgages is a leading Toronto mortgage broker, which specializes in all types of mortgages ranging from home equity loans, second mortgages, private mortgages, mortgage refinancing, mortgage renewals, home mortgages and hard money lending.

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