Bank of Canada maintains overnight rate target

Bank of Canada maintains overnight rate target at 1 per cent
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OTTAWA, Jan. 18 /CNW/ - The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economic recovery is proceeding at a somewhat faster pace than the Bank had anticipated, although risks remain elevated. Private domestic demand in the United States has picked up and will be reinforced by recently announced monetary and fiscal stimulus. European growth has also been slightly stronger than anticipated. Ongoing challenges associated with sovereign and bank balance sheets will limit the pace of the European recovery and are a significant source of uncertainty to the global outlook. In response to overheating, some emerging markets have begun to implement more restrictive policy measures. Their effectiveness will influence the path of commodity prices, which have increased significantly since the October Monetary Policy Report (MPR), largely reflecting stronger global growth.

The recovery in Canada is proceeding broadly as anticipated, with a period of more modest growth and the beginning of the expected rebalancing of demand. The contribution of government spending is expected to wind down this year, consistent with announced fiscal plans. Stretched household balance sheets are expected to restrain the pace of consumption growth and residential investment. In contrast, business investment will likely continue to rebound strongly, owing to stimulative financial conditions and competitive imperatives. Net exports are projected to contribute more to growth going forward, supported by stronger U.S. activity and global demand for commodities. However, the cumulative effects of the persistent strength in the Canadian dollar and Canada's poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada's current account deficit to a 20-year high.

Overall, the Bank projects the economy will expand by 2.4 per cent in 2011 and 2.8 per cent in 2012 - a slightly firmer profile than had been anticipated in the October MPR. With a little more excess supply in the near term, the Bank continues to expect that the economy will return to full capacity by the end of 2012.

Underlying pressures affecting prices remain subdued, reflecting the considerable slack in the Canadian economy. Core inflation is projected to edge gradually up to 2 per cent by the end of 2012, as excess supply in the economy is slowly absorbed. Inflation expectations remain well-anchored. Total CPI inflation is being boosted temporarily by the effects of provincial indirect taxes, but is expected to converge to the 2 per cent target by the end of 2012.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.

New Mortgage Rules

New Mortgage Rules
from the Department of Finance Canada


Ottawa, January 17, 2011
2011-003
The Harper Government Takes Prudent Action to Support the Long-Term Stability of Canada's Housing Market
________________________________________
The Honourable Jim Flaherty, Minister of Finance, and the Honourable Christian Paradis, Minister of Natural Resources, today announced prudent adjustments to the rules for government-backed insured mortgages to support the long-term stability of Canada's housing market and support hard-working Canadian families saving through home ownership.
"Canada's well-regulated housing sector has been an important strength that allowed us to avoid the mistakes of other countries and helped protect us from the worst of the recent global recession," said Minister Flaherty. "The prudent measures announced today build on that advantage by encouraging hard-working Canadian families to save by investing in their homes and future."
"The economy continues to be our Government's top priority," continued Minister Paradis. "Our Government will continue to take the necessary actions to ensure stability and economic certainty in Canada's housing market."
The new measures:
• Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent. This will significantly reduce the total interest payments Canadian families make on their mortgages, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire.
• Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. This will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.
• Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs. This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.
Our Government's ongoing monitoring and sound underlying supervisory regime, along with the traditionally cautious approach taken by Canadian financial institutions to mortgage lending, have allowed Canada to maintain strong and secure housing and mortgage markets.
The adjustments to the mortgage insurance guarantee framework will come into force on March 18, 2011. The withdrawal of government insurance backing on lines of credit secured by homes will come into force on April 18, 2011.

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Bank of Canada raises key interest rate a quarter point to one per cent

Bank of Canada raises key interest rate a quarter point to one per cent


Julian Beltrame, The Canadian Press
OTTAWA - The Bank of Canada raised the trend-setting interest rate a quarter point to one per cent on Wednesday, even as it acknowledged that the country's economic growth will be more gradual than previously thought.


It was the third hike in three months, taking the overnight rate up in stages from the rock-bottom 0.25 per cent that was set by the central bank during the recession to help stimulate the economy.

The hike, which most economists had predicted and supported, will likely have the effect of increasing borrowing costs on short-term loans, such as variable mortgages and lines of credit.

The Canadian dollar got an immediate boost following the announcement, rising 1.11 cents to 96.53 cents US.








Analysts had been looking for acknowledgment from bank governor Mark Carney that the recovery has taken a few surprise body blows of late and that he will now pause for the next few months until the picture clears.

Instead, the bank's governing council appeared content to stick to its previously optimistic outlook and gave no hint about plans for future decisions, saying that will depend on the "unusual uncertainty" of the outlook.

The council remained upbeat on the economy, downplaying its overly optimistic April and July forecasts.

"Economic activity in Canada was slightly softer in the second quarter than the bank had expected, although consumption and investment have evolved largely as anticipated," the council wrote.

"Going forward, consumption growth is expected to remain solid and business investment to rise strongly."

The tone of the central bank's statement was "a bit more hawkish than we expected," said Bank of Montreal economist Douglas Porter.

"The Bank of Canada clearly retains its tightening bias and seems generally unfazed by the recent cooling in the Canadian economy," Porter wrote in a note to clients.

"While we had been expecting the bank to now move to the sidelines for a spell, it appears that it will take a deeper slowdown in domestic spending (as we suspect) than what we have seen so far to prompt them to stop raising rates."

In July, the bank downgraded its previous call for a 3.8 per cent advance in the second quarter - the April-June period - to three per cent.

But in fact, both were wildly off. Statistics Canada reported last week the period only produced a two per cent increase in output, about one-third the pace of growth seen in the first three months of the year.

The bank conceded that the growth profile for the economy going forward will be "slightly more gradual" than it had thought and that since proceeding to withdraw monetary stimulus in April "financial conditions in Canada have tightened modestly."

Even so, with a one per cent policy rate the cost of borrowing in Canada remains "exceptionally stimulative," the bank said.

It blamed weakness in the U.S. economy, which is being held back by the high levels of unemployment, for the slowdown in Canada. Canada's recovery has outpaced most, if not all, of the G7 leading economies, particularly the U.S., which continues to shed net jobs while Canada has recouped almost all of those lost during the 2008-2009 recession.

The bank said its policy rate is consistent with reaching a two per cent inflation target in the medium term.

But economists question how much further Carney can go with the U.S., Canada's largest trading partner, contemplating more stimulus.

Uncertainty Surrounds Rate Announcement

Uncertainty surrounds rate announcement; markets try to counter September effect

05/09/2010 6:00:00 AM

Malcolm Morrison, The Canadian Press
TORONTO - The Canadian dollar could be in for some volatility this coming week as the Bank of Canada comes out with its latest announcement on interest rates Wednesday.


The dollar ended last week at the 96-cent mark and currency markets aren't really sure which way the central bank will lean. That's because analysts were putting the odds of another quarter-point hike - to one per cent - at 50-50, reflecting a slowdown in the Canadian and particularly the U.S. economies over the last quarter.

"We are officially calling for the Bank of Canada to raise rates by a quarter point next week," said Doug Porter, deputy chief economist at BMO Capital Markets.








"But I would say an informal poll of the economics department here would probably put the odds of that at about 55 to 60 per cent. We do see it as a very close call and that's the way the market is pricing for a rate hike right now."

Meanwhile, stock markets could find momentum going into trading this week as readings last week on U.S. manufacturing and employment data could counter seasonal effects which have given September the reputation of the worst trading month of the year.

The Bank of Canada has raised rates from an historic low of 0.25 per cent twice this year, in June and July, as the Canadian economy mended from recession faster than just about any other country.

But even with another quarter-point rise, the central bank could well decide to take a pause after recent data showed North American economies slowing.

The U.S. economy grew at an annualized rate of only 1.6 per cent during the second quarter.

And Statistics Canada reported last week that the domestic economy grew at annualized reading of two per cent during the second quarter, down sharply from 5.8 per cent in the January-March period.

Back in April, when things looked rosier for the global economy, Porter thought "the bank would raise its rates to about two and a half to three per cent over the next year. Now we're thinking one to maybe 1.5 per cent."

And even before the central bank gets to that point, the question is how long it will keep rates at one per cent.

"We now see that possibly right through the middle of next year and that's really the big change in recent months for us - beyond just taking a little bit of a trip to the sidelines later this year, we think that could last longer," Porter said.

"Because frankly it doesn't look like the U.S. Federal Reserve is going to raise rates for at least the next year, and could drag well into 2012 even, unless we really get a very pleasant surprise from the U.S. economy."

However, the revised forecast is certainly good news for consumer borrowing costs and could breathe new life into a flagging housing market.

"We have seen the longer-term mortgage rates coming down in recent months as that expectation of a less aggressive Bank of Canada has been built into the market," Porter noted.

But no matter what the bank announces on Wednesday, Porter thinks there will be an effect on the loonie, particularly from the bank's commentary.

"Let's say they hike, and they come out and signal they might move to the sidelines, then the rally on the dollar won't last long," he said.

"If they hike and they still sound like they could hike further, then the currency will strengthen quite a bit. That's not even getting into what it would do if they don't hike."

Meanwhile, stock markets ended the week on a strong note as positive manufacturing data from China and the U.S. and the U.S. employment report for August, which showed private-sector job creation exceeding expectations, left the TSX at a three-and-a-half month high.

The biggest headwind might just be the fact that it is September - the worst trading month of the year.

There are a few theories why this is so. For example, mutual fund managers take profits on winning stocks and ditch the losers as they make the third quarter look as good as possible.

Last year was a happy exception, as markets were in the course of a long positive run from the depths of March 2009 as investors started to price in a strong economic rebound.

The S&P 500 has shed at least five per cent in September four times in the past decade alone.

However, this September could also prove to be a decent month.

"And that could be based on valuation that we're seeing in the marketplace, it could be based on the fact that investors will be focusing on the positives as opposed to the negatives," said Philip Petursson, director of institutional equities at MFC Global Investment Management.

"You have to focus on the fact that companies seem to be tripping over themselves to acquire each other. They are more confident and, from what we are seeing, there is much better investment opportunity in equities now than there has been over the past couple of years based on valuation, companies' balance sheets (and) pending activity through merger and acquisition activity."

Petursson added that another reason to be more optimistic on the equity markets is that, relative to bonds, stocks are cheaper than they have ever been.

Bank of Canada

Bank Prime Lending Rate
June 2, 2010 2.50 %
July 21, 2010 2.75 %
September 9, 2010 Next meeting date
Source: Bank of Canada



Bank of Canada Interest Rate
June 1, 2010 0.50 %
July 20, 2010 0.75 %
September 8, 2010 Next meeting date
Source: Bank of Canada


Conventional Mortgage - 5 Year Rate*
August 16, 2010 5.59 %
August 23, 2010 5.49 %
August 30, 2010 5.39 %
Source: Bank of Canada
*Determinant for high ratio mortgage variable qualifying rate

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