Interest rate cut may boost job creation, home ownership
Published Wednesday, January 21, 2015 2:03PM EST
Last Updated Wednesday, January 21, 2015 5:48PM EST
While the Bank of Canada’s interest rate cut Wednesday came as a surprise, some definite winners and losers will emerge from the central bank’s move.
Gov. Stephen Poloz said the decision is in direct response to the drop in the price of oil and the impact it is having on the Canadian economy.
The cut surprised economists, but will help a range of Canadians, including small and large businesses in the non-energy sector, as well as homeowners.
Poloz acknowledged that an interest rate cut “may exacerbate household imbalances…by encouraging more borrowing.”
However, in a press conference explaining his decision, Poloz told reporters that the “far more important effect” will be to provide some cushioning for the decline in household income due to job losses in energy and related sectors.
Low oil prices translate to cheaper prices at the pumps, Poloz noted. This leaves more disposable income in consumers’ pockets to spend as they please.
However, they may hold on to that cash if they fear that their job may not be secure.
That belt-tightening will have a trickle-down effect throughout the economy, Poloz said.
Lower interest rates have a “stimulative effect” on the economy by creating ideal conditions to invest, says TD senior economist Randall Bartlett.
When interest rates fall, so too do the yields from savings tools, such as savings accounts. As a result, savers and investors will look to find better returns in other assets, with the stock market being the “traditional fallback,” Bartlett said Wednesday.
“When you reduce interest rates, that reduces the cost of borrowing and it provides an incentive to invest, to borrow for future investment,” Bartlett told CTV’s Power Play.
The Bank’s rate cut will likely have some impact on variable mortgage rates, which could boost the real estate markets in non-energy producing provinces.
Consumers in Ontario, for example, may feel compelled to purchase or upgrade their home, TD economist Craig Alexander told The Canadian Press. However, residents of energy-producing provinces such as Alberta, Saskatchewan and Newfoundland and Labrador may be less inclined to ramp up their debt levels.
Homeowners who are at renewal time and shopping around for rates may also be able to lock in for a better deal, for the short-term, at least.
The best move for a central bank to address a drop in resource prices is to do what it can to get the economy operating at full capacity, Poloz said Wednesday.
This means helping non-energy businesses-- which he noted have been experiencing steady growth in recent months-- access the credit needed to expand.
Non-energy exporters will continue to benefit from a weaker loonie and strong economic growth in the United States, Poloz told reporters, “and those kinds of effects are going to turn into jobs.”
It remains unclear how quickly Canadian exporters will be able to rebound, given how badly they were hammered by the dramatic rise in oil prices and the recession south of the border in recent years, he said.
However long it takes, Poloz said, “changes can be helped by ensuring credit channels are open for small and big companies” to invest in their businesses, including hiring more workers.