NNSL (OCT 07/96) - Canadian borrowers and shoppers got more good news last Thursday when the big banks lowered rates on mortages and credit cards.
The three biggest Canadian banks Royal, CIBC and Bank of Montreal trimmed mortgage rates by up to a quarter-point on most terms ranging from six months to five years. The new rates went into effect last week.
It was the second time in a week mortgage rates had dropped in Canada in the wake of an improved interest rate picture in the United States.
Meanwhile, Royal Bank cut the rates it charges on most of its consumer credit cards by one percentage point. The new rate of 16.5 per cent on outstanding balances is effective with next month's statements.
The latest cuts come after last Wednesday's quarter-point drop in the prime rate benchmark for consumer and corporate loans to 5.5 per cent, the lowest level in 2 years.
That cut came after the Bank of Canada trimmed its bank rate Wednesday for the 17th straight time since May 1995. The recent upswing in the dollar and stabilizing rates in the U.S. have given Canada's central bank much more room to lower interest rates to stimulate the economy.
Lower rates have done wonders for the housing market, boosting new home construction and sharply increasing the number of resales across the country.
``Now is a good time to get into the housing market,'' said Ed Gettings, chief operating officer of CIBC Mortgage Corp.
``Things look reasonably stable on the interest rate front over the next four or five weeks. But beyond that the Fed is going to be making some decisions and that will obviously impact our market as we go forth.''
Gettings said many of the bank's customers are opting for short terms while others are locking into five- or seven-year terms.
``It depends on the customer's preference for the rate they get and the risk they're willing to assume,'' he said. ``I doubt you could make a bad move by going either long or staying short at this point.''
The Bank of Canada has been squeezing short-term rates for more than a year to stimulate consumer spending and get the economy to create jobs. While 82,000 jobs were created in August, 1.4 million Canadians are still out of work and unemployment remains at 9.4 per cent.
While economists agree lower interest rates will boost job creation, there's still differing opinions on whether rate cuts are breathing life into consumer spending.
Mike Manford, chief economist at Scotia Capital Markets, said lower interest rates, tax cuts in Ontario and wage increases higher than inflation should contribute to a robust consumer spending increase of 3.5 per cent next year.
``Combine this with an inflation rate that remains under control and we see some good times ahead for consumers,'' he said in a report Thursday.
But Jeff Rubin, chief economist at CIBC Wood Gundy, said falling interest rates have failed to spark spending. He said consumers are overtaxed and their incomes aren't rising fast enough to sustain a spending pickup.
He urged the federal government to use the money it has saved in financing its debt at lower interest rates to slash taxes by up to $4 billion. Finance Minister Paul Martin has refused to cut taxes, saying that would force the government to gut social programs to offset the revenue loss.
``Shrinking real wages and soaring tax bills have left households struggling with the largest tax burden in history,'' Rubin said in a monthly economic report.
``In an economy with no income growth and record tax burdens, the fiscal dividend could be effectively channelled into a tax cut.'' (From Canadian Press)