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Interest Rates on the Move?

March 25th, 2010 No comments

As a result of stubborn inflation and stronger then expected economic growth signs are becoming more clear that Canadians could be seeing interest rate hikes sooner then previously anticipated.

Bank of Canada’s Mark Carney did not directly state that higher rates were on the way however, he did issue his clearest indication to date that his year-old commitment to keep the policy rate at the record 0.25 per cent until July was “expressly conditional” on inflation remaining tame.

In a speech to a business audience, the bank governor noted that both underlying core inflation and economic growth have grown slightly stronger, although broadly proceeding as expected.

The tip-off to economists was that he changed his language on his conditional commitment on interest rates, which has led to historically low rates for both consumers and businesses in Canada and helped the country recover from recession.
“This commitment is expressly conditional on the outlook for inflation,” he told the Ottawa Economic Association.

It was the first time Carney has undercut the commitment in such pointed language.
“They still have considerable latitude, but the changes that would be required to their forecast are consistent with hiking rates sooner than markets are anticipating,” said Derek Holt, Scotiabank’s vice-president of economics. He said Carney may move as early as June 1.

But Holt stressed that Carney’s overall message to Canadians is that rates will remain low by historical standards for some time.

“No matter what, we emerge from this with lower rates at the end point of the hiking campaign than in past cycles. He’s saying the outlook is clouded with risks and there’s a number of reasons to expect growth to be lower than past cycles.”

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Source: Julian Beltrame, The Canadian Press

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Countdown to Rate Hikes

March 8th, 2010 No comments

The Bank of Canada took its first steps Tuesday toward returning the country to more normal interest-rate levels by signalling a more hawkish tone on inflation and acknowledging the economy is performing better than expected on “vigorous” consumer demand.

The messages were conveyed in the Bank of Canada’s latest interest-rate statement, which kept its record-low benchmark rate of 0.25 per cent and pledged to keep it there at least until July.

But most bank watchers took note of subtle changes in the statement, compared with previous rate announcements, and there was enough there for them to begin the countdown to rate hikes.

“I suspect (Bank of Canada governor) Mark Carney and company are starting to feel the urge to tighten — not a strong urge now, but an urge nevertheless,” said Michael Gregory, senior economist at BMO Capital Markets.

Among the key changes was a declaration from the bank that the risks to its inflation outlook are “roughly balanced,” and no longer “tilted slightly to the downside” — language that suggests deflation is no longer a concern and that price increases are creeping up to a level that may prompt a response.

The wording change from the Bank of Canada may appear trivial, “but it is nonetheless significant as it reflects an economic backdrop that continues to improve at a much faster pace than what the bank had envisaged,” said Paul-Andre Pinsonnault, senior fixed-income economist at National Bank Financial.

In the statement, the central bank acknowledged economic activity has been “slightly higher” than its own projections, with the five-per-cent gain in the fourth quarter powered by “vigorous domestic demand” and a recovery in exports.

The consensus remains that the central bank will wait until July to begin raising rates. There are two more scheduled rate decisions between now and then — April 20 and June 1.

“What we saw (Tuesday was) one of many steps aiming at moving away from dovish statements to relatively more hawkish ones,” said Sebastien Lavoie, economist with Laurentian Bank Securities.

His firm predicts rate increases will begin in the third quarter, but he said the odds have increased that the first hike will be in July as opposed to September.

Economists are predicting increases of one full percentage point to 1.5 points over the second half of 2010.

Source: Paul Vieira, Canwest News Service

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Bank of Canada Maintains Interest Rates

March 2nd, 2010 No comments

The Bank of Canada is keeping its benchmark lending rate at a record low of 0.25 per cent, reiterating on Tuesday its conditional commitment to hold rates steady until the middle of this year.
Although it held the overnight lending rate steady, the bank acknowledged the recovery appears to be proceeding at a better pace than it had anticipated.
“The level of economic activity in Canada has been slightly higher than the bank had projected in its January Monetary Policy Report,” the bank said in announcing the rate decision.
“Conditional on the current outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.”
It is set to release its next decision on interest rates on April 20.

Source: CBC News
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Interest Rate Update

February 4th, 2010 No comments

A quarterly Reuters poll published last Thursday indicates growth from the Canadian economy in 2010. This growth however is not indicated to be prompt enough to influence the Bank of Canada to raise interest rates anytime soon.

The survey consisted of around 20 economists, conducted over the past week, with their predictions on how the Canadian economy will emerge from the recession. The general consensus was growth by an annualized 2.5% in 2010, in line with predictions from the same poll in October.

The poll comes as the Bank of Canada this week held its key interest rate at a record low, as expected, and changed growth forecasts only slightly, highlighting weak U.S. demand and a strong Canadian dollar as risks to the recovery.

“The growth will come as the Bank of Canada notes in its press statement from the domestic side, which is benefiting from the record low interest rates and fiscal stimulus,” said Sal Guatieri, senior economist, BMO Capital Markets.
“So we should continue to see strength in housing markets, auto sales and generally a pick up in consumer spending. As well, the upturn in commodity prices should support business investment.”

The domestic economy has been aided in part by the Bank of Canada slashing rates to an all-time low near zero, where it has pledged to keep them until the end of June next year as long as inflation stays in check.

The poll shows economic growth is not expected to be forceful enough to spark a rate hike any time soon, with the median forecast in the poll not calling for any monetary tightening until July at the earliest.

The median forecast of the poll has the Bank of Canada keeping its key rate steady at 0.25% until the third quarter, when it is expected to raise it to 0.75%. It is expected to raise the rate further to 1.25% by the end of 2010, the poll showed.

Housing starts are expected to average 173,000 units in 2010, up 8.5% from the 159,400 units forecast for this year in the October poll. For 2011, housing starts are forecasted to rise to 180,000 units the median forecast showed.
Information from Jennifer Kwan, Reuters, Financial Post

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Bank of Canada Maintains Interest Rate

October 28th, 2009 No comments

OTTAWA, Ontario, October 20, 2009 — The Bank of Canada held its benchmark overnight lending rate steady at 0.25 per cent at its setting on October 20th, 2009. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, remains at 0.5 per cent.

The Bank acknowledged that recent indicators point to the start of a global recovery, and that economic and financial developments have turned more favourable than it had previously expected.

In its September announcement to hold interest rates steady, the Bank forecast that inflation would return to its two per cent target in the second quarter of 2011. The Bank has now moved that date out to the third quarter of 2011.

The Bank’s commitment to keep interest rates on hold until the second half of next year is conditional on the outlook for inflation. Since inflation is not expected to pick up sooner than it previously expected, the Bank repeated its commitment to keep interest rates on hold. “Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.”

The Bank pointed to the rapid rise in the Canadian dollar in recent weeks as a risk to the Canadian economic recovery, saying “Heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures.” The Bank now expects that the domestic economy will be a greater source for economic growth, at the expense of weaker net exports.

“The Bank threw cold water on recent speculation that it may raise interest sooner rather than later,” said CREA Chief Economist Gregory Klump. “By highlighting the recent rapid rise in the Canadian dollar while intentionally failing to mention the rebound in the Canadian housing market as sources for concern, the Bank aimed to end recent speculation that it will hike rates before its repeated pledge of not doing so until at least July 2010.”

As of October 20th, the advertised five-year conventional mortgage rate stood at 5.84 per cent. This is down 1.36 per cent from one year earlier, but stands 0.35 per cent above where it stood when the Bank made its previous interest rate announcement on September 10th.

Improving credit market conditions have enabled lenders to reintroduce discounts off posted mortgage interest rates. Discounts of up to a percentage point can be negotiated, depending on lender-broker relationship.

News source: The Canadian Real Estate Association (CREA)

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