Tuesday, January 08, 2008

Predictions For 2008 Interest Rates in Canada and US

Here are some predictions on Mortgage Interest Rates for 2008 from RBC

More rate cuts coming from the Fed and Bank of Canada

The ongoing turbulence in financial markets is affecting the outlook for U.S. and Canadian economic growth. U.S. real GDP growth is expected to slow to a pace of 1% to 1.5% over the next three quarters, while Canada's economy gears down to grow at less than a 2% pace, much slower than the 3.4% average rate in the first three quarters of the year.

This has led us to revise our interest rate forecasts downward. We now expect the U.S. Federal Reserve to lower the Fed funds rate by a further 75 basis points to 3.75% over the next three meetings. This is a change from the 25 basis points of easing in our previous forecast.

The combination of slower U.S. growth, volatility in global financial markets and moderating inflation rates saw the Bank cut the overnight rate by 25 basis points in December, and we expect another 25 basis-point rate cut in January. A month ago, we expected the Bank to cut the overnight rate by only 25 basis points.

Our expectation that the trade drag will continue to be substantial in coming quarters and that domestic demand will slow as the tightening in credit conditions takes a bite out of household and business spending means that the Bank will edge the policy rate lower in early 2008 as the economy shifts into a lower gear.

U.S. third-quarter GDP growth was revised up to a 4.9% annual rate from an already-robust 3.9%, implying that the economy had solid momentum as the tightening in credit conditions hit.

The deepening in credit market tightening and persistent financial market volatility mean that households and businesses are likely to remain nervous and risk-averse heading into 2008. We expect that the U.S. economy will eke out a growth rate of 1.5% in the first half of next year.

In this environment, the Fed will likely put inflation concerns on the back burner and focus on mitigating the downside risks to the economy. The Fed will likely lower the funds rate by a further 75 basis points; this, combined with a government-led program to limit future mortgage defaults should be enough to stave off a recession and support stronger growth in the second half of 2008.

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A. Mark Argentino
P. Eng. Broker
Specializing in Residential & Investment Real Estate

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