Boring Bank of Canada Announcement Foretells Wild New Things In World Economy

The Bank of Canada (BoC) today announced that it will be doing nothing with their key overnight lending rate, medications thus leaving the Prime lending rate at major FI’s the same. The Prime lending rate will remain at 2.7% which is the base rate for virtually all variable/floating or adjustable rate lending in Canada.

WIld new things are happening in the world economy:

  • Oil prices remain lower
  • Interest rates have turned negative in Europe & Japan
  • There is a chronic shortage of demand for goods and services and, treatment advanced economies tend to save more as their populations age
  • Investment into the means of production is meager – the new economy is asset-lite. Companies such as SkipTheDishes, Airbnb and Lyft prosper by using assets that already exist.
  • Software which is an intangible and does not require the construction of machinery & factories, accounts for larger share of the economy.

Interest rates like any price is a function of supply and demand. Rates have fallen and remain low because the demand for loans is weak and the supply of money (for loans) is strong.

There is an ever growing belief by experts and economists that the only way out of our stagnant world economy is for fiscal stimulus rather than monetary stimulus, that is: government spending versus central bank manipulation.

For the time being interest rates and the possibility of them moving, up or down, in Canada is a dead issue. Canada, of all healthy countries, is last to the table with business investment (a function of the tax environment). Our dollar is weak but we still have a problem competing with other countries for exports because our productivity (output per labor hour) is uncompetitive.

Copyright Mortgage Logic 2016