The financial turmoil that rocked Europe last week was more than an indication of troubles abroad. Attracted by high rates there, foreign investors initially sold Canadian dollars and bought other currencies. In two days last week, the Canadian dollar tumbled by more than half a cent. That slump helped push the trend-setting Bank of Canada rate upward for the second week in a row, to its highest level since July 30. Although only a small increase, to 5.34 per cent from 5.14, the upward movement showed that the relatively low interest rates that have prevailed in Canada since last spring are vulnerable to influences that are beyond domestic control. Said Michael Gregory, an economist at the Royal Bank of Canada: “The fundamentals of the Canadian economy have not changed much from
last spring. The precipitating event for these changes was Europe.”
But by week’s end, the Canadian dollar had recovered from its plunge to an eight-year low of 81.70 on Sept. 16, rebounding to close at 82.17 two days later. For their part, Canadian banks decided that the increase in the bank rate was too small to justify a matching move in lending rates for consumers. As a result, economic experts said that both the Canadian dollar and domestic interest rates had weathered the international storm relatively well. They added that despite the looming crisis over the Constitution, Canada still has an international reputation for political stability. That makes it attractive in the long term to foreign investors, many of them looking for safe financial havens. Said Michael Devereux, professor of economics at the University of British Columbia: “Canada is viewed as a stable place to invest, partly because the Bank of Canada has established a lot of credibility by taking a firm stand on inflation. Investors are really more interested in the fundamentals than in short-
term fluctuations in interest rates.”
Most analysts also concluded that last week’s rise in the bank rate was a temporary aberration in the general trend towards lower Canadian interest rates. They advised consumers not to make major decisions, including locking in mortgages for long terms, solely on the basis of the small increase. Said George Vasic, director of economics at Toronto-based forecasting firm DRl/McGraw Hill: “The average person with a mortgage should not worry about Europe. Their decisions about their mortgages should reflect the size of their debt and their own financial position.” He added: “The bigger the debt, the more important it is to lock in. Those with smaller mortgages can afford to take more of a risk.” For the many Canadians concerned about their own financial futures, it will be a long time—if ever—before the ripple from Europe becomes a wave.
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