Here's an article concerning sub prime lending and the effect that the US market is having/is predicted to have on the Canadian market. It's quite an interesting read - for those of you interested, I've pasted it here!
Financial market turmoil could lead to lower interest rates, economists say
By ROMINA MAURINO
2007-08-10 14:19:00
TORONTO (CP) - Current turmoil in financial markets may keep Canadian interest rates at low levels as the Bank of Canada hesitates to curb lending in such a volatile environment, economists say.
"If anything, the turmoil might actually, possibly, lead to lower interest rates than would have otherwise been the case," Doug Porter, a senior economist with BMO Capital Markets, said Friday.
"I'm not saying the Bank of Canada is necessarily going to go and cut interest rates, but they're potentially less willing to rise interest rates amid this volatility."
Financial experts are watching North American stock markets closely after this week's stiff losses, while central banks around the world scramble to ease concerns about a looming credit crunch.
Over the past two days, the Bank of Canada has made more than $3 billion available to Canadian banks at low interest rates. And the U.S. Federal Reserve has contributed US$19 billion in a bid to calm jittery investors.
Like many economists, those at BMO had been expecting the Bank of Canada to raise rates in September to dampen inflationary pressures, possibly again in October and in early 2008.
"That series of potential rate increases is being put at least in some question because the bank may not be all that enthusiastic about raising interest rates when the financial markets are going through so much trauma," Porter said.
"By extension, there's potentially some good news here for borrowers."
TD deputy chief economist Craig Alexander said he still expects the U.S. economy to continue to grow at a fairly slow pace of around 2.5 per cent and believes the Fed is unlikely to cut rates in the near future.
But, he added, "a lot if it depends to what extent financial markets continue to be worried."
"If markets come down, if the fear of the fallout from the subprime (mortgage) market subsides, then the most likely scenario is the central banks won't cut rates," he said.
"If, on the other hand, the fear remains in the market, and this does lead to a tightening in credit, then I do think the central banks stand ready to cut rates in order to ensure the financial system remains healthy and to offset the potential fallout."
The subprime market, in which lenders provide mortgages to higher-risk borrowers, has led to a slump in U.S. housing, foreclosures and the collapse of companies that lent too freely.
It accounted for about 20 per cent of the U.S. mortgage industry but made up only about five per cent of the market in Canada. Still, the problems in the United States have made getting credit more difficult in Canada as well.
Alexander said the most direct impact of market upheaval will be on individual portfolios because the repricing of global markets will affect returns of financial products like mutual funds.
But, he said, it has also caused bond rates to come down, which is "actually good for people who are renewing their mortgages or from a borrowing point of view, because the long-term interest rates are coming down."
