Skip to main content

Per cent blocks.

Golkin Oleg/Getty Images/iStockphoto

If we're to take the words of our central bankers at face value, low interest rates will still be around though most of 2015 and perhaps into 2016.

Last week's Bank of Canada statement and the quarterly Monetary Policy Report were gloomy about the prospects for a speedy economic recovery, both here and internationally.

Governor Stephen Poloz used the words "serial disappointment" in reference to global economic performance and said the BoC remains "preoccupied with downside risks to economic activity and the fundamental drivers of inflation." Translation: Interest rates aren't going up any time soon.

Story continues below advertisement

In fact, the Bank is so concerned that it has dialled back its forecast for Canadian economic performance for the rest of this year. The prediction now is that our economy will grow by 2.3 per cent in the third quarter and 2.4 per cent in the fourth quarter. That's down from 2.6 per cent and 2.5 per cent previously. However, the inflation forecast has been raised to 2 per cent in the third quarter, up from 1.8 per cent in the earlier forecast.

Slower growth plus higher inflation? That's not a good mix by any economic standard. However, the tepid growth outlook gives Mr. Poloz and company an excuse to keep the key target rate at 1 per cent for the foreseeable future. That will help to hold the loonie in check – if speculators were to believe a hike is coming soon, they would drive the value of our dollar higher. That would deal a serious blow to Mr. Poloz's hopes for an export-driven recovery.

U.S. Federal Reserve Board chair Janet Yellen followed a similar line last week by suggesting in testimony before Congress that the unemployment situation in the States is not as bright as it seems because many people have given up and stopped looking for work. She told the Senate Banking Committee that the Fed needs to be "quite cautious" in its monetary policy, referring to the "false dawns" that have sparked premature predictions of a strong economic recovery. Her remarks were interpreted as signalling the Fed will retain its low interest rate policy at least until next year.

Prolonging the low interest cycle into mid-2015 and perhaps beyond has several important implications for investors. They include:

A continuation of the hot housing market
Low mortgage rates mean that houses in most parts of the country are affordable, even as prices rise. If there is a housing bubble, as many analysts claim, the most effective way to gradually deflate it is through modest interest rate hikes. It doesn't look like that is going to happen any time soon.

A stronger bond market
Bonds have performed much better this year than anyone expected with the DEX Universe Bond Index up over 5 per cent at the time of writing. Rising interest rates are bond killers, so the longer they remain low, the better things will be for bond investors.

Premium valuations for dividend stocks
High dividend stocks are vulnerable when rates rise. But when rates are low, investors are willing to pay up for above-average cash flow. Given the choice between a 5 per cent dividend on a blue-chip stock and a 2.5 per cent rate on a five-year GIC, most smart investors will opt for the higher return.

Story continues below advertisement

Report an error
About the Author

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. More

Comments

The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

We’ve made some technical updates to our commenting software. If you are experiencing any issues posting comments, simply log out and log back in.

Discussion loading… ✨

Combined Shape Created with Sketch.

Combined Shape Created with Sketch.

Thank you!

You are now subscribed to the newsletter at

You can unsubscribe from this newsletter or Globe promotions at any time by clicking the link at the bottom of the newsletter, or by emailing us at privacy@globeandmail.com.