Canadian Prime staying at 3% – maybe for half a year
Comment – this article exactly summarizes our thoughts for how things will play out:
Prime will stay at 3% for 6 months, mortgage rates will stay low as long as the stock market bounces all over the place and now is a great time to take advantage of the situation by redoing our mortgage or buying.
Bank of Canada holds key rate at 1%
OTTAWA — Interest rate hikes are on hold until at least the spring and maybe as long as late 2011, analysts say, as the Bank of Canada decided Tuesday to keep its policy rate unchanged amid weaker-than-anticipated growth, especially in the United States.
The Canadian dollar fell by more than two cents at one point following the decision, as the central bank signalled the country would need to rely more on net exports for growth — a sign, economists added, the loonie’s value would be a key consideration in future rate decisions.
The central bank said it scaled back its growth projections for this country as the global recovery enters a “new phase.” It now expects GDP to expand just three per cent this year and 2.3 per cent in 2011, compared to expectations in July for advances of 3.5 per cent and 2.9 per cent, respectively. Second-quarter GDP growth, at two per cent annualized, was well below the central bank’s forecast of three per cent expansion.
Further, the Bank of Canada said it does not envisage the Canadian economy reaching full potential until the end of 2012, or one year later than previously expected. The same timeline applies to inflation — which guides all interest-rate decisions — as the “significant” excess slack would keep consumer prices increases from reaching the desired 2% level for another two years.
“This is not just a data watching central bank that is keeping its powder dry in order to evaluate developments over coming months — this is a central bank that has totally revised its outlook and market guidance,” said analysts at Scotia Capital. “To us, the Bank of Canada is saying they are on hold until late next year.”
The central bank also signalled the composition of growth is set to change, with less emphasis on consumer spending and increased reliance on business investment and net exports.
The Canadian dollar recovered slightly after its initial drop. It was trading around 96.92 cents U.S. at 11 a.m., down from Monday’s close of 98.61 cents U.S..
Jonathan Basile, economist at Credit Suisse Securities in New York, said this indicates the Bank of Canada “will be watching the Canadian dollar more closely” as strength in net exports is predicated on a loonie that doesn’t strengthen too much against its U.S. counterpart.
The statement “appears to be a pretty clear signal of the Bank of Canada’s intention to pause,” said Michael Woolfolk, managing director at BNY Mellon Global Markets in New York. “Moreover, it suggests that the central bank may pause longer than expected. With the Bank concerned now about the economy’s increasing reliance on net exports, it will take particular care not to unnecessarily bolster the loonie through future rate hikes.”
Economists at Royal Bank of Canada and Toronto-Dominion Bank told clients that March of next year might be the earliest at which the central bank resumes rate hikes.
“The economic outlook for Canada has changed,” said the central bank, led by governor Mark Carney. “(A) more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending” as real-estate activity slows and consumers deal with their personal debt.
The decision to keep key rate unchanged leaves “considerable monetary stimulus” in place to achieve the central bank’s preferred two per cent target, the central bank indicated.
Plus, Basile said the central bank signalled three factors that stand in the way of future rate hikes: a weaker U.S. outlook; constraints curbing growth in emerging-market economies; and domestic considerations, most notably household debt.
Tuesday’s rate statement reflects a more dovish tone from the central bank compared to its last decision roughly six weeks ago, when it opted to raise its benchmark interest rate by 25 basis points for a third consecutive time. More detail regarding the central bank’s outlook will emerge Wednesday when the Bank of Canada releases its latest quarterly economic outlook.
The big game-changer, analysts say, is the tepid U.S. economy and the signals from the U.S. Federal Reserve that it’s preparing to inject additional liquidity in the economy through asset purchases, with a dual goal of lowering borrowing costs and boosting inflation expectations.
As a result, a pause from the Bank of Canada “is entirely justifiable,” said Eric Lascelles, chief Canadian strategist at TD Securities, in a note to clients prior to the release of the central bank’s decision. “The thought that if the U.S. needs (further easing), the economic prospects for the U.S., and by extension Canada, are also threatened.”
The Bank of Canada said the global economic recovery is entering a “new phase,” as the factors supporting growth in advanced economies, such as the rebuilding of inventories and pent-up demand, subside just as fiscal stimulus is wound down.
“The combination of difficult labour market dynamics and ongoing de-leveraging . . . is expected to moderate the pace of growth relative to prior expectations,” the central bank said. “These factors will contribute to a weaker-than-projected recovery in the United States in particular.”
Growth in emerging economies is expected to ease as governments in those markets put the brakes on stimulus spending and raise borrowing costs. As it happened, China raised interest rates earlier Tuesday.
And recent moves by emerging markets and advanced economies to intervene in foreign-exchange markets was highlighted by the Bank of Canada as a further risk to the global economic recovery. “Heightened tensions in currency markets and related risks associated with global imbalances could result in a more protracted and difficult global recovery,” the central bank said.
The warning emerges just days before a key Group of 20 meeting of finance ministers and central bankers in South Korea in which foreign-exchange policies is now expected to dominate the agenda. Both Carney and Finance Minister Jim Flaherty are set to attend the meeting.
© Copyright (c) Postmedia News
Prime to stay the same until March 2011
Report says BoC likely to hold rates until March 2011
This month’s RBC Financial Markets Monthly publication reports that the Bank of Canada is likely to hold rates until March 2010.
Report Excerpts:
Canada takes a breather after sprinting out of recession
With real GDP standing a hair’s breadth away from its pre-recession peak and final domestic demand already treading into new territory, reports of more moderate activity in July did not prove too surprising. The sharp recovery in the housing market started to stall in mid-2010 because pent-up demand generated during the recession was satiated and buying—ahead of the mild tightening in mortgage rules and the implementation or increase in the HST in three provinces—was exhausted. The robust sales pace left a high level of household debt in its wake resulting in the debt-to-income ratio rising to an all-time high in the first quarter.
Recent growth has not been strong enough to exert significant downward pressure on the unemployment rate and inflation pressures have been moderate with the core rate at 1.6%. The headline inflation rate was 1.7% in August, thereby holding below the Bank’s 2% target, even after the harmonization of provincial and federal sales taxes in Ontario and BC were incorporated into the price measure. Unlike in the US, where we expect that core inflation will remain very low, we forecast Canada’s core rate to hold just below the 2% target during the forecast horizon and gravitate above 2% in mid-2012.
Rate increases likely to resume in early 2011
Our overall assessment of the Canadian outlook has changed little in the past month, so we are maintaining our call that the Bank will gradually raise the overnight rate to 2.25% in the second half of 2011. This gradual reduction in policy accommodation will keep a lid on the degree that term interest rates will rise especially against a backdrop of very low U.S. rates. We trimmed our 2011 forecast for yields looking for the two-year rate to end 2011 at 2.85% and the 10-year bond yield at 3.75%.
Other highlights from this month’s Financial Markets Monthly:
- U.S. data have been a mixed bag and confirm that the U.S. recovery is continuing, albeit slowly. The risk of deflation, not inflation, appears to be at the top of the mind for policymakers now with the Fed likely to implement another round of quantitative easing to ensure that growth and inflation do not slow further.
- The uncertain global outlook is likely to be the dominant factor in the Bank of Canada shifting to the sidelines for the remainder of 2010.
- Policymakers in the UK are unlikely to deliver a further easing in policy unless conditions become much worse.
- The RBA stayed on the sidelines this month although the statement showed a clear tightening bias which sets up for a hike before year end.
- Canada’s economy sputtered in July after very robust domestic demand earlier in the year.
- Inflation remains mild with both the headline and core rates below the Bank’s 2% target.
- The uncertain global outlook is likely to be the dominant factor in the Bank shifting to the sidelines for the remainder of 2010.
Rate increases on hold for Bank of Canada
Preword: It looks like the Canadian interst rates can not rise above the US to much and the US will have to keep their rates the same for most all of 2010 and most of 2011. That means our rates will stay close to the same as now for another 18 months! Great news if you are on the variable rate mortgage.
We have variable rates are Prime – .65% right now, from good banks.
CIBC World Markets Inc. trims forecast for rate hikes and currency strength in Canada as economic growth outlook dampens abroad
TORONTO, Aug. 18 /CNW/ – Continuing weakness in the U.S. economy may force the Bank of Canada to put interest rate hikes on hold after September, notes a new report from CIBC World Markets Inc.
… “Forget about any rates hikes from the U.S. Federal Reserve until sometime in 2012 at the earliest.”
While Canada is in much better economic shape – it leads the U.S., Eurozone, U.K. and Japan in first-half growth and has a record gap over the U.S. in the share of working age population holding a job – it “cannot move all the way to normalized interest rates while the U.S. Federal Reserve is still on hold,” Mr. Shenfeld contends.
For starters, an interest rate differential of 300-400 basis points would take the loonie “substantially stronger” creating additional headwinds for Canadian economic growth, says Mr. Shenfeld.
Furthermore, the “external environment will be one of less-than-normal growth as fiscal tightening bites in Europe and the U.S., and with our own upcoming fiscal tightening also hitting domestic demand, monetary policy might have to be set at stimulative levels to allow the economy to return to potential and remain there. To keep moving at all, you have to step on the gas if your car is trying to roll up a steep incline.”
The report also notes that there are limits to how far the Bank of Canada can diverge from the U.S. Federal Reserve without later regretting it. Episodes in recent years in which rate overnight rates were 2 per cent or more above those stateside resulted in sagging or sacrificed growth. These are “lessons learned, we hope,” says Mr. Shenfeld.
“Since a hike at every rate setting date through 2011 would take rates substantially higher than 2%, a pause is coming on the road to tightening.”
As a result of the dampened external growth outlook, Mr. Shenfeld has trimmed his call for rate hikes. He sees Canadian overnight rates going no higher than 2% next year as the U.S. Federal Reserve stays on hold.
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/gps_aug10.pdf
Prime up 1/4% as expected
Comment: many think that Prime will hold here or go to 3% and hold there for a long while as the economy gets going again.
1/4% Prime Raise
The Bank of Canada raised its benchmark interest rate by 25 basis points for the second time in two months, even as households and governments in the developed world continue to cut back on spending.
The rate is now 0.75 per cent. The bank said any further increases “would have to be weighed carefully against domestic and global economic developments.”
The central bank became the only one in the Group of Seven to hike its key lending rate after keeping it at unprecedented lows during the recession.
While economic growth in Canada has largely relied on consumer spending, the bank now projects that business and trade will make up a larger part of the country’s gross domestic product, but overall growth won’t be as large as the bank previously thought.
The bank now estimates that Canadian GDP will expand 3.5 per cent in 2010 and 2.9 per cent in 2011, down from the previous projection of 3.7 per cent and 3.1 per cent respectively.
Prime rate increase in the cards
comment: Variable rates should stay a good mortgage option as Prime is expected to stay at 3% for the rest of the year. Prime – .6% will be a 2.4% mortgage rate and the fixed rates will stay around the 4% mark. The great thing is fixed rates are coming down now so a variable will save now and you can lock in later when the 5 year fixed is even lower.
Week Ahead: Rate hike in the cards
Kim Covert, Financial Post · Friday, Jul. 16, 2010
OTTAWA — Two major announcements bookending the coming week’s economic news will provide a clearer snapshot of the state of the Canadian recovery.
The Bank of Canada will be first up when it makes its monthly interest rate announcement on Tuesday. But that will come before Friday’s critical report from Statistics Canada on the country’s consumer price index for June.
The central bank raised its benchmark index rate in June by 25 basis points, and at the time expectations were that the rate would increase steadily. But in the weeks since that announcement concerns about a double-dip recession have been growing, increasing speculation that the bank would hold the course. Consensus expectation is for a 25 basis-point increase on Tuesday, bringing the rate to 0.75%, though analysts disagree on what will happen as the year unfolds.
“While both domestic and global conditions have deteriorated modestly since June, the underlying momentum in the Canadian economy warrants the continued normalization of policy in the near term,” wrote strategist David Tulk of TD Securities in a note to investors. “When we look further into the future, the impact of financial market turmoil and decelerating economic growth is more difficult to quantify. In recognition of this uncertainty, we have scaled back our forecast for rate increases, and now look for a year-end overnight rate of 1.25% and a rate of 2.50% by the end of 2011.”
Economist Michael Gregory of BMO Economics, who also calls for a another 25 basis point increase, said he expects the bank to make one more increase of that size in September then hold the line for the remainder of the year. CIBC is calling for the rate to reach 1.25% in October, followed by a pause lasting at least two quarters.
The Bank of Canada’s rate announcement will come ahead of the key June inflation report on Friday. The consensus expectation is for 0.1% month-over-month drop in the consumer price index on lower gasoline prices, while the core year-over-year inflation rate will be unchanged at 1.8%, below the Bank of Canada’s target of two%.
CIBC economist Krishen Rangasamy said that while the rate announcement will precede the CPI, he doesn’t expect the “milder” June prices will have any effect on the rate. He said July’s prices should get a bounce from the harmonized sales tax introduced on July 1 in Ontario in British Columbia.
The bank will also release its Monetary Policy Report on Thursday. Mr. Rangasamy doesn’t expect the bank to make material changes to its April forecast of 3.5% growth for the second half.
“The only thing will be perhaps in the tone of the report. We think that they might adopt a more cautious tone on the external environment, particularly what’s happening in Europe and elsewhere, with slower Chinese growth, so they might adopt a little bit more cautious tone as opposed to their upbeat tone in April.”
Statistics Canada reports in the coming week include securities transactions on Monday, travel data on Tuesday, wholesale trade on Wednesday, as well as employment insurance and retail trade data on Thursday.
On the corporate front, some major Canadian companies will be reporting earnings on Thursday, including Canadian National Railway, Shoppers Drug Mart and Loblaw Cos.
Rates may not go up
Rate hike not guaranteed….Global financial chaos could override domestic factors
Emily Mathieu Business Reporter Toronto Star
Higher than expected rates of inflation and reports of record breaking retail sales means interest rate hikes will likely go ahead, according to a top economist with BMO Capital Markets. But domestic strength might not be enough to justify increases if the upheaval in global markets continues, said Porter.
“If the (Bank of Canada’s) decision was based solely on domestic factors, then this would be no questions asked, no debate,” said Doug Porter, deputy chief economist.
The central bank has long predicted rates would rise on June 1, but Porter said doubt over the future of global economic stability could cause them to go off course.
“It would take a very brave central bank indeed, I think, to raise interest rates in the face of the turmoil we are seeing in global financial markets right now.”
According to Statistics Canada’s Consumer Price Index, the core index advanced 1.9 per cent during the 12 months leading up to April, following a 1.7 per cent increase in March.
The boost in April was due mainly to a rise in prices for the purchase of passenger vehicles, passenger vehicle insurance premiums, property taxes, and food purchased from restaurants, the report showed.
The seasonally adjusted monthly core index rose 0.2 per cent in April, following a 0.3 per cent decline in March.
Consumer prices across the country rose 1.8 per cent in the 12 months leading up to April, following a 1.4 per cent increase in March. In Ontario, prices rose 2.2 per cent.
Porter said BMO has no plans to alter their position that rates will rise on June 1, but said that position could change if market upheaval continues into next week.
“If Canada were an island there would be no debate,” said Porter. “There is a very compelling domestic case for higher interest rates.”
Statistics Canada reported a 2.1 per cent increase in retail sales dollars in March, to $37 billion. Porter said earlier reports had predicted sales would be close to flat. “Instead we get one of the best gains on record.”
National energy prices rose 9.8 per cent between April and the same time the previous year, following a 5.8 per cent increase during the 12 months between March 2010 and the same time the previous year. Excluding the increase in energy the index rose 1.1 per cent, compared with a 1 per cent increase in March.
For the sixth month in a row, gas prices exerted the strongest upward pressure on the index. In April, Canadians paid 16.3 per cent more at the pump than they did the same time the previous year. That change follows a 17.2 per cent increase between March of this year and the same time in 2009.
Natural gas prices were up 3.3 per cent in April than the same time the previous year. Between March 2010 and the same time the previous year prices had dropped 22.4 per cent.
The cost of transportation was up 6.2 per cent in the 12 months to April and consumers paid a 5.6 per cent more for insurance premiums in April compared to the previous year.
Housing costs were up 0.8 per cent, after declining 0.7 per cent in March, with household utilities exerting the most upward pressure. The mortgage cost index fell 6.1 per cent, the report showed.
Food prices were up 1 per cent, following a 1.3 per cent increase in March. The 1 per cent rise, largely related to prices for food purchased in restaurants, was the smallest since March 2008.
Health care prices rose 3.3 per cent, the report showed. http://www.thestar.com/business/article/812567–rate-hike-not-guaranteed
Home ownership costs increase across Canada except Alberta says RBC report
By The Canadian Press TORONTO – Owning a home in Canada has become even more expensive _ unless you live in Alberta, according to the latest housing report by RBC Economics Research.
The report, released Tuesday, says homeownership costs in Canada rose for the third straight quarter across all housing segments in the first quarter of 2010. A strong real estate market and jacked up housing prices are getting the blame for putting a strain on Canadians’ bank accounts.
“Although home ownership became more costly in the first quarter of 2010, affordability measures are still moderately above the long-term average and below peak levels,” said RBC senior economist Robert Hogue.
“We expect affordability to deteriorate throughout 2010 and 2011, but this should be limited as more balanced supply and demand conditions will take much of the steam out of the housing market,” he said.
The RBC Housing Affordability report projects that the cost of owning a home will continue to rise.
The main contributing factor is an expected rise in interest rates, as the Bank of Canada moves towards raising the current exceptionally low rates to more normal levels through the second half of this year and in 2011.
According to the report, housing affordability measures in Canada are unlikely to exceed the peak levels reached in early 2008.
With the exception of Alberta, home affordability measures deteriorated across all provinces with a significant decline in affordability in B.C., Saskatchewan and Manitoba.
Housing affordability declined more moderately in Quebec, Ontario and Atlantic Canada. Alberta is the only province to show a drop in the costs of owning a home. http://ca.news.finance.yahoo.com/s/25052010/2/biz-finance-home-ownership-costs-increase-across-canada-except-alberta.html