Thursday, March 4, 2010

OPR Up 25BP: No Surprise

They did it.

What’s the proximate effect of this rise? Not much really – while there’s a statistically significant relationship between real interest rates and loan growth at the margin, it’s only with the core inflation measure and even that comes with pretty high standard errors. Unless of course you want to try specifying a full scale model with multiple lags (not up to that today).

Banks’ net margins will be compressed for a month or two as they adjust their lending rates, but the effect on profits should be negligible. Yields on debt instruments o the other hand have already risen the past couple of months – I think the market’s more than half-expecting a rate hike anyway, so the secondary market is already covered.

In fact, the market might be perverse and rally a bit (i.e. yields drop). As they say: buy on rumour, sell on fact – which is actually just another way of saying rational expectations.

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