March 4, 2010, 5:00 am

What Will The Canadian Prime Interest Rate Be at The End of 2010?

by: The Financial Blogger    Category: Banks and You
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Before I start with this morning’s article, I want to ask you to vote for me in the Free Money Finance March Madness contest. The best personal finance article will win the right to give $1,000 (generously provided by FMM) to a charity of your choice. I have selected a charity that helps children. Please comment on this post with the word “figures”. Thx a million!

The Prime Rate, or Prime Lending Rate, is a term used in many countries to describe an interest rate reference used by Central Banks. This key rate has been a major discussion for the past 6 months, as we realized that the sky is not falling and soon talk about economic growth and prosperity will dominate again. The prime rate is the starting point for all discussions involving mortgage rates (especially variable rates that are directly linked to prime). When discussing interest rates, we usually address debt management and how tough it would be if mortgage rates would climb to 6%+ again …

I don’t really like to play Nostradamus with regards to market trends or interest rates and I’ll show you why today. Recently, Bloomberg asked several economists their opinion on the Canadian Prime Rate and at where it would be at the end of 2010. You can see their predictions in the following table:

BankPrime Rate At the end of 2010
Laurentian Bank1.50%
National Bank1.50%
CIBC0.25%
TD0.75%
Desjardins0.75%
RBC1.25%
Scotia Bank1.25%
Morgan Stanley2.25%

Out of 8 highly paid and hopefully knowledgeable economists, we notice predictions of a Canadian Prime Rate between 0.25% (no change) and 2.25% (an increase of 2.00% within one year… or should I say 10 months!) for an average prediction of 1.18%.

So my question is quite simple: how can someone predict no change and another (with the same level of knowledge/competence/tools of analysis) forecast a rate that is 9 times higher? I even read that some economists from Desjardins see the Prime Rate at 7% in 5 years… I guess I should call them to know which stocks will give me a 20% annualized return over the next 5 years. They probably have it written in their black book of prophecy ;-) This is why I spoke about Nostradamus!

So what is the point of this post if it’s not to predict the Prime Rate?

The point is to tell you that you will read a lot of apocalyptical scenarios about the interest rate going up since semsationalism sells. The very same people that were convinced that capitalism was dead 12 months ago will try to convince you that we are going to back to 12% interest rates as seen in the 80’s.

In fact, you will probably see a smooth increase in the interest rate as the economy gains its second wind. However, it won’t happen overnight ;-)

We still have a fragile economy, high unemployment rate (8.3%) and job creation doesn’t reflect reality as most of them are part time or under paid compared to the lost jobs. In addition to that, do I have to mention that the loonie is strong enough compared to the US dollar that we don’t really need interest rates to give it the final push to parity?

What if we see 10 years of near to zero economic growth as Japan experienced? Oh shoot…. That’s it! I am writing about another apocalyptic scenario on the other side… see how easy it is to predict the future based on rationale?

image source: Xurdle

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Comments

I predict that interest rates will go up. The End.

Figures!

by: The Financial Blogger | March 4th, 2010 (7:56 pm)

you can certainly get a job in a bank ;-)

I read an article a while back on different approaches/forumulas to predicting the price of oil. Applying all the different theories to historical data, they found that predicting no change in the price of oil outperformed (was closer to correct on average than) all other methods, though the price obviously was constantly changing.

i think we’ll start to see interest rates moving up in the months to come. It will be interesting to see what they will be come the end of 2010.

Nice post

[...] The Financial Blogger highlighted the fact that nobody could predict the interest rate in Canada by end of this year. One expert said the interest rate could be as low as 0.25%; another expert said the interest rate could be as high as 2.25%. [...]

Rates will go up, definitely.

You won’t get a lost decade in Canada — too much in the way of resources for that!

The world is hungry for raw materials. Right place, right time! :)

Ooh I’m happy with those predictions! *sigh* who knows what will really happen, eh?
I certainly hope that the 80′s prime rates don’t happen ever ever again! (not that I really had to experience what it was like, but still. Just sayin’)

by: The Financial Blogger | March 7th, 2010 (4:12 pm)

You don’t have to worry too much, high interest rate are less likely to happen.

This would completely kill our economy and put 80% of homeowner in the street!

I agree last post 80% of homeowners in the street.. Yes rates will go up, but can’t see Prime hitting 6% anytime soon… As banks arrears ratio’s would go through the roof and we would be looking at a U.S melt down in real estate values… My prediction is Prime will go up by no more then 2.5% over the next 3 years… There I said it…..