What's happening with interest rates ?

The easy answer is ... who knows ? This summer I was lucky enough to hear an economist from one of the big banks who gave some interesting opinions. At the time, in Ontario and Eastern Canada the manufacturing sector was preparing for a rough ride. The loonie was strong - it wasn't yet near or over parity as we saw in the fall of 2007 - which seemed to be a result of the overall strong economy and oil sector in Western Canada. So the predicament facing the Bank of Canada (B.O.C.) was: raise interest rates and maintain the strong/rising dollar (hurt the East in other words) OR lower rates to take momentum away from the increasing Canadian dollar and hurt the west. A no-win situation to be sure. We all remember what happened and the eastern part of the country has been feeling the hit ever since.
The B.O.C. will again be setting rates tomorrow and this time around we have a new puzzle to decipher. Added to the ever present question of what they will do (raise, maintain or lower) to rates, we have a new twist in the mix. Some analysts and people in the know are hinting that the "normal set of rules" may not apply this time in how the country's banks and lenders react to the B.O.C.'s decision.What are the normal rules ? If the B.O.C. lowers it's rate the banks follow and reduce theirs too and if the B.O.C. raises then they follow suit. Now for the twist. Perception is that with all the trouble in the U.S. mortgage lending industry and the big Canadian banks' exposure - writedowns/layoffs etc due to non-performing or just plain poor investments - the lenders here may not lower their rates EVEN IF THE B.O.C. DOES SO. The plan if it turns out to be true would mean that the banks are going to try to recoup their U.S. losses on our shoulders.
Whatever happens in the next couple of days it will be interesting. Check back with us and see what the fall out is - see you then !