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.