Weakening Canadian dollar shows no interest in growing

canadian_dollarJust when you thought the Bank of Canada’s interest rate couldn’t go any lower, it has — and with it, the Canadian dollar is taking a beating.

The key lending rate is now 0.5 per cent (down from 0.75 per cent), which may sound good if you’re buying a home (as some retail banks will pass along some of the difference in mortgage rates), but the truth is the cut isn’t designed to give you more buying power, as a Toronto Star article points out. “It was about widening the gap between our interest rates and those in the U.S. to push our dollar down,” it reads. The hope is that the weaker dollar will stimulate more investment from the U.S. and create more exports.

As a result, the Canadian dollar dropped to its lowest rate in years (and as of mid-August, it’s even lower, at 77 cents on the U.S. dollar).

That’s not good news for those of us who like to spend winters south of the border or travel abroad frequently. And, make no mistake: the lower Canadian dollar is driving up inflation here at home, meaning you’re going to pay more for everyday items, like clothing, in Canada.

The Globe and Mail said the government expects consumer prices in Canada to be 1.5 per cent higher by year’s end because of the weak loonie’s effect on import costs.

Meanwhile, the U.S. is looking to possibly boost its own interest rates as its economy bounces back, which could drive further disparity between the U.S. greenback and the loonie.

Some experts even fear the struggling commodity prices in Canada (think oil and lumber) will continue to drag down the Canadian dollar to as low as 55 cents U.S.

While it’s possible our lower loonie could stimulate foreign investment (especially in the real estate sector, thanks to a weak currency and low rates), it’s also making some domestic investors nervous and driving some to invest their dollars in U.S. stock markets that performed well in 2014.

The bottom line is, the Bank of Canada interest cut will have little to no effect on the economy, and may actually have an overall negative effect on Canadian citizens. This is a good chance for federal parties who are gearing up for an election to pitch their best economic strategies.