BUSINESS

Easing the interest-rate pain

JOHN HAY October 18 1982
BUSINESS

Easing the interest-rate pain

JOHN HAY October 18 1982

Easing the interest-rate pain

At least for the diminishing number of Canadians still lucky enough to have a job, the financial news last week carried the golden glow of Indian summer. There was a sharp and welcome fall in interest rates, which cut the cost of mortgages, consumer loans and business debt. And, partly as a consequence, prices were soaring on the New York and Toronto stock exchanges as investors converted their cash and bonds into equity shares. Still, there was a grim chill in the latest unemployment figures, which portend a miserable winter for millions across the country.

Statistics Canada reported that 1,343,000 people were officially unemployed in September, fully 51 per cent more than a year ago.

Seasonally adjusted, the jobless rate was 12.2 per cent of the labor force—the same as in August. And that post-Depression record did not include perhaps the saddest statistic—those who have given up seeking jobs and dropped out of the labor market altogether. Perhaps even more telling, the number of employed has fallen in the past year—down 4.4 per cent since September, 1981, to 10,544,000. The economy now is not merely failing to keep pace with the demand for jobs, it is actually contracting. As for 1983, the Conference Board of Canada predicts that economic growth will be barely perceptible. It forecasts that unemployment next year will average 13 per cent.

Against such bleak prospects, the new interest rates blew north across the border like a warm wind. They began with reports that the U.S. Federal Reserve Board would permit the U.S. money supply to expand beyond the board’s tight targets, at least temporarily. Combined with the recessionweakened demand for loans, the effect was to drive down the prime lending rate that U.S. banks charge preferred corporate customers. At 13 per cent, the U.S. prime is now at its lowest in two years.

The impact on Canadian rates was immediate. The Bank of Canada cut its bank rate by nearly half a percentage point to 12.56 per cent. It was the seventh straight week for a cut in the trend-setting bank rate, and the chartered banks got the message. Within a

day they chopped their own prime rate half a point to 14.5 per cent. Meanwhile, mortgage rates were also coming down—again as a result of weak demand and the plentiful supplies of available mortgage money.

Whether cheaper mortgages will boost the construction industry remains to be seen, but the housing business needs all the good news it can get. The government reported last week that housing starts in September fell to an annual rate of 86,000—the lowest rate in 22 years.

Punctuating the drop in interest rates was the setting of the 1982 Canada Savings Bond rate at 12 per cent, far below the 19.5 per cent attached to CSBs last year. The finance department was widely criticized last fall for setting its bond rate far too high compared to other competing savings rates. This time it waited an extra month before fixing the rate, in order to catch the market trend more accurately. Officials point out that the CSBs, on sale Oct. 25, will still earn g two percentage points 2 more interest than a y typical savings ac" count—an amount

greater than the half-point edge traditionally given to the savings bonds to lure buyers.

The most spectacular of all reactions to the interest rate news was seen on the stock exchanges. On the New York board last Thursday,volume hit a record 147 million shares—nearly 10 million more than the last one-day record, set Aug. 26. On the same day, the Toronto exchange ran up its second-best gain of the year. In a frantic two days of trading, roughly $5.73 billion was added to the value of TSE shares, for a total of $111 billion. By the time the computers cooled down Friday night, the TSE composite index stood at 1697.89, its highest since Feb. 5.

For all the fireworks, however, investors were clearly more impressed by lower interest rates than by any good news from the companies they were buying. At the same time that stock prices were rising, Statistics Canada was confirming that profits and sales remain mired in recession. With consumer spending remaining stagnant, that bad news is certain to darken the picture at least for the remainder of the year. -JOHN HAY in Ottawa.