BoC may have to break interest rate promise
Alia McMullen, Financial Post Published: Thursday, July 23, 2009
TORONTO -- The Canadian dollar hit a 10-month high Monday amid growing risk appetite and rising expectations that inflation will ultimately force the Bank of Canada to break its promise to keep interest rates on hold until mid-2010.
"The time for tightening is not yet at hand, but June 2010 seems too late," said Yanick Desnoyers, the assistant chief economist at National Bank Financial. "The day when the condition for the Bank's low-rate commitment is no longer met will probably come before then."
Mr. Desnoyers said the benchmark interest rate had been lowered to a record low of 0.25% to limit the damage of the recession and financial crisis. However, he said the rate was too low relative to core inflation, which stood at 1.9% in June, just one basis point below the bank's target rate.
The outlook for higher interest rates, whether they come sooner or after June next year, has helped support the Canadian dollar, which has increased by about 8% since the beginning of the month.
The loonie inched up US0.16¢ to US$92.50 Monday after reaching its highest level since October in intraday trade. The rise was boosted by an improvement in investor sentiment after new U.S. home sales surged by 11% in June and the three-month Libor rate, the benchmark borrowing rate banks generally charge each other, fell to a record low 0.496%.
The decline in Libor, which peaked at 4.82% in October, is a sign that credit pressures continue to ease. Commodity prices were also marginally higher amid expectations of an uptick in demand.
Aron Gampel, vice president and deputy chief economist at Scotia Capital, said the Canadian dollar has also strengthened against the greenback because many were concerned U.S. stimulus efforts would leave behind a problematic debt hangover. He said the loonie was likely on its way back to parity with the U.S. dollar.
With the Bank of Canada having declared that the recession is likely over, interest is beginning to turn to when interest rates will begin to rise. Some, such as Mr. Desnoyers, believe the Canadian recovery, bolstered by government stimulus, will push inflation up faster than expected, forcing the Bank of Canada to use its "get out of jail free card" and raise the benchmark policy rate before June 2010.
The central bank said it would keep interest rates on hold until June 2010 "conditional on the outlook for inflation".
Bond yields have risen in recent weeks and now reflect a 90% chance of an interest rate rise withing nine months.
Others, such as Mr. Gampel, believe the central bank will keep interest rates on hold until mid next year, but embark on an aggressive tightening thereafter.
However, he said the economy was at a turning point and the Bank of Canada's ultimate decision would depend on the speed of economic recovery.
"They could be looking at having to push interest rates up at a faster rate, and sooner, if the recovery takes on a greater scope going forward," Mr. Gampel said.
He said the recovery could well be on track to outpace expectations as businesses rebuild inventories, consumer spending picks up and fiscal stimulus kicks in.
However, he said evidence to date does not suggest the central bank will need to hike rates before June, particularly with a large amount of excess capacity in product and labour markets.
Tuesday, July 28, 2009
Tuesday, July 21, 2009
Bank of Canada Holds Key Rate Steady
The Bank of Canada announced this morning that it will leave its key interest rate unchanged.
The Bank also reiterated its commitment to hold its key rate at the current level until the end of the second quarter of 2010, conditional on the outlook for inflation. In its statement the Bank noted that in Canada, “stimulative monetary and fiscal policies, improved financial conditions, firmer commodity prices, and a rebound in business and consumer confidence are spurring domestic demand growth.
However, the higher Canadian dollar, as well as ongoing restructuring in key industrial sectors, is significantly moderating the pace of overall growth.”
Lenders are expected to keep their prime lending rate steady. Variable-rate mortgages, variable-rate credit cards, and home equity lines of credit are typically linked to a lender’s prime rate.
Pricing for fixed-rate mortgages is not directly affected by today’s announcement.
Friday, July 10, 2009
Worst may be over for the housing market
Garry Marr, Financial Post
New home construction rose for a second straight month in June, in what analysts say is another sign that the worst may be over for the Canadian housing market.
Canada Mortgage and Housing Corp. said Thursday there were 140,700 new homes constructed in June on a seasonally adjusted annualized basis. Construction was up almost 8% from the 130,300 May figure.
"There are some pretty good signs that we are starting to see in the housing market," said Bob Dugan, chief economist with CMHC. "We've seen it for quite a few months on the existing homes side."
Existing home sales rose 42% from January to May across the country and the early indications are that June was strongest month this year. Sales in Vancouver were up 76% last month compared with a year earlier and Calgary and Toronto both recorded 27% increases during the same period.
Existing home inventories have begun to shrink across the country, convincing builders to ramp up construction. CMHC said urban single family homes -- considered the best barometer of the new home market -- climbed 7.3% in May from a month earlier.
"It's well into seller's market territory again with the May and April numbers," said Mr. Dugan.
The optimism about the Canadian market comes despite the fact new construction at 140,000 units is way off the 200,000-plus figure the market in Canada has seen for the past seven years.
"I can only speculate, but maybe a lot of people are relieved we are not seeing the decreases we have seen in the U.S.," said Mr. Dugan. "Peak-to-trough, the decline in the U.S. was something like 80%. In Canada, that would mean we'd have to have 55,000 starts. Some people may have thought that's where the Canadian market was going."
The consensus among economist is construction won't return to pre-recession levels but will gradually improve in the coming months.
"This month's increase is an important confirmation that the Canadian housing sector is past the worst and in recovery mode," said Marco Lettieri, an economist with National Bank. "The recovery seems to be broad based with gains observed in both multiple [which includes condominium construction] and single units."
Robert Kavcic, an economist with Bank of Montreal, said there could be some room for modest growth in starts in the coming months.
"Higher affordability and improved consumer confidence brought buyers off the sidelines this spring," said Mr. Kavcic.
A report this week from RBC Economics said declining prices and lower interest rates led to one of the biggest quarterly improvements in affordability in history. The bank said monthly payments on a typical detached bungalow in Canada had decreased by almost 17% from a year earlier.
Royal LePage Real Estate Services was also forced this week to upgrade its forecast for 2009 because of the improved market conditions. It now expects 430,000 sales this year, an improvement from its previous call of 416,000, but still down 1% from a year ago.
"I think 2009 will go down as a moderate correction as opposed to the deep and sustained recession that we had first feared," said Phil Soper, chief executive of the real estate company.
Royal LePage expects prices this year will still fall but not by as much as previously feared. It expects the average sale price in 2009 to be $297,000, a 2% drop from last year. It had previously forecast a 3.5% decline.
Mr. Soper said a decline is still tough to swallow after years of compound growth of close to 10% in the housing market but it's proving to be a far cry from what has happened in the United States.
"We are long way from the 35% decline that a lot of regions in the United States are experiencing. It's a very different kind of correction," said Mr. Soper
Unemployment rises, but not as much as feared
Canada's economy lost 7,400 jobs in June, far less than expected, even as the country continued to struggle through an economic downturn.
The unemployment rate rose to an 11-year high of 8.6%, up from 8.4% in May, Statistics Canada said Friday.
"Full-time employment continued its downward trend in June, offsetting gains in part-time," the federal agency said. "Employment was little changed in June, leaving total net losses during the last three months at 13,000, much smaller than the 273,000 decline in the first three months of the year."
Most economists had expected 35,000 job losses in June, with the unemployment rate rising to 8.7%.
On Thursday, however, Finance Minister Jim Flaherty warned that job losses are likely to continue for the months ahead.
Most analysts forecast the jobless rate will peak at the mid-9% range some time next year.
"In the months ahead, given the very weak backdrop for the Canadian economy, we expect the negative labour market dynamics to continue and the pace of job losses to remain fairly brisk," Millan Mulraine, economics strategist at TD Economics, said ahead of Friday's report.
Canada's economy shrank 5.4% in the first quarter of this year, its fastest pace of contraction since 1991. That followed a 3.7% decline in the fourth quarter of 2008. The Bank of Canada expects the economy to contract a further 3.5% in the second quarter of 2009.
On Wednesday, the International Monetary Fund revised its outlook for the Canadian economy, saying GDP is now expected to contract by 2.3% this year, compared to its earlier forecast of a 2.5% decline. The IMF, which monitors the global economy, and provides financial and technical assistance to its 186 member nations, also raised its forecast for 2010 growth to 1.6% from the 1.2% it had predicted in April.
Canwest News Service
Garry Marr, Financial Post
New home construction rose for a second straight month in June, in what analysts say is another sign that the worst may be over for the Canadian housing market.
Canada Mortgage and Housing Corp. said Thursday there were 140,700 new homes constructed in June on a seasonally adjusted annualized basis. Construction was up almost 8% from the 130,300 May figure.
"There are some pretty good signs that we are starting to see in the housing market," said Bob Dugan, chief economist with CMHC. "We've seen it for quite a few months on the existing homes side."
Existing home sales rose 42% from January to May across the country and the early indications are that June was strongest month this year. Sales in Vancouver were up 76% last month compared with a year earlier and Calgary and Toronto both recorded 27% increases during the same period.
Existing home inventories have begun to shrink across the country, convincing builders to ramp up construction. CMHC said urban single family homes -- considered the best barometer of the new home market -- climbed 7.3% in May from a month earlier.
"It's well into seller's market territory again with the May and April numbers," said Mr. Dugan.
The optimism about the Canadian market comes despite the fact new construction at 140,000 units is way off the 200,000-plus figure the market in Canada has seen for the past seven years.
"I can only speculate, but maybe a lot of people are relieved we are not seeing the decreases we have seen in the U.S.," said Mr. Dugan. "Peak-to-trough, the decline in the U.S. was something like 80%. In Canada, that would mean we'd have to have 55,000 starts. Some people may have thought that's where the Canadian market was going."
The consensus among economist is construction won't return to pre-recession levels but will gradually improve in the coming months.
"This month's increase is an important confirmation that the Canadian housing sector is past the worst and in recovery mode," said Marco Lettieri, an economist with National Bank. "The recovery seems to be broad based with gains observed in both multiple [which includes condominium construction] and single units."
Robert Kavcic, an economist with Bank of Montreal, said there could be some room for modest growth in starts in the coming months.
"Higher affordability and improved consumer confidence brought buyers off the sidelines this spring," said Mr. Kavcic.
A report this week from RBC Economics said declining prices and lower interest rates led to one of the biggest quarterly improvements in affordability in history. The bank said monthly payments on a typical detached bungalow in Canada had decreased by almost 17% from a year earlier.
Royal LePage Real Estate Services was also forced this week to upgrade its forecast for 2009 because of the improved market conditions. It now expects 430,000 sales this year, an improvement from its previous call of 416,000, but still down 1% from a year ago.
"I think 2009 will go down as a moderate correction as opposed to the deep and sustained recession that we had first feared," said Phil Soper, chief executive of the real estate company.
Royal LePage expects prices this year will still fall but not by as much as previously feared. It expects the average sale price in 2009 to be $297,000, a 2% drop from last year. It had previously forecast a 3.5% decline.
Mr. Soper said a decline is still tough to swallow after years of compound growth of close to 10% in the housing market but it's proving to be a far cry from what has happened in the United States.
"We are long way from the 35% decline that a lot of regions in the United States are experiencing. It's a very different kind of correction," said Mr. Soper
Unemployment rises, but not as much as feared
Canada's economy lost 7,400 jobs in June, far less than expected, even as the country continued to struggle through an economic downturn.
The unemployment rate rose to an 11-year high of 8.6%, up from 8.4% in May, Statistics Canada said Friday.
"Full-time employment continued its downward trend in June, offsetting gains in part-time," the federal agency said. "Employment was little changed in June, leaving total net losses during the last three months at 13,000, much smaller than the 273,000 decline in the first three months of the year."
Most economists had expected 35,000 job losses in June, with the unemployment rate rising to 8.7%.
On Thursday, however, Finance Minister Jim Flaherty warned that job losses are likely to continue for the months ahead.
Most analysts forecast the jobless rate will peak at the mid-9% range some time next year.
"In the months ahead, given the very weak backdrop for the Canadian economy, we expect the negative labour market dynamics to continue and the pace of job losses to remain fairly brisk," Millan Mulraine, economics strategist at TD Economics, said ahead of Friday's report.
Canada's economy shrank 5.4% in the first quarter of this year, its fastest pace of contraction since 1991. That followed a 3.7% decline in the fourth quarter of 2008. The Bank of Canada expects the economy to contract a further 3.5% in the second quarter of 2009.
On Wednesday, the International Monetary Fund revised its outlook for the Canadian economy, saying GDP is now expected to contract by 2.3% this year, compared to its earlier forecast of a 2.5% decline. The IMF, which monitors the global economy, and provides financial and technical assistance to its 186 member nations, also raised its forecast for 2010 growth to 1.6% from the 1.2% it had predicted in April.
Canwest News Service
Monday, July 6, 2009
OECD pointers could keep variables low for longer
The Organization for Economic Cooperation and Development recommended the Bank of Canada keep its key interest rate close to zero until the end of 2010 in its most recent economic outlook.
"The Bank of England has lowered policy rates to 1/2 per cent. The Bank of Canada has cut the interest rate to 1/4 per cent, and has also conditionally committed to hold this rate until the end of the second quarter in 2010," the OECD outlook read. "In both countries, the projections warrant keeping the policy rate as close to zero as possible up to end-2010."
The report also said the Bank of Canada likely won't need to resort to other monetary measures to speed up recovery, adding, "the fiscal authorities retain room for further temporary fiscal stimulus should the recovery fail to materialize as expected." Although it didn't predict a swift recovery for Canada, the OECD did reduce its prediction of how much the country's economy will shrink in 2009 to 2.6 per cent, down from three per cent in March and said the GDP will grow by 0.7 per cent in 2010.
In his speech at the International Economic Forum of the Americas on June 11 Bank of Canada governor Mark Carney repeated his commitment to keep the key interest rates low into 2010. The Bank of Canada also recently announced it would extend the use of its temporary facilities to boost financial market liquidity until early next year as opposed to introducing new measures.
OECD pointers could keep variables low for longer
The Organization for Economic Cooperation and Development recommended the Bank of Canada keep its key interest rate close to zero until the end of 2010 in its most recent economic outlook.
"The Bank of England has lowered policy rates to 1/2 per cent. The Bank of Canada has cut the interest rate to 1/4 per cent, and has also conditionally committed to hold this rate until the end of the second quarter in 2010," the OECD outlook read. "In both countries, the projections warrant keeping the policy rate as close to zero as possible up to end-2010."
The report also said the Bank of Canada likely won't need to resort to other monetary measures to speed up recovery, adding, "the fiscal authorities retain room for further temporary fiscal stimulus should the recovery fail to materialize as expected." Although it didn't predict a swift recovery for Canada, the OECD did reduce its prediction of how much the country's economy will shrink in 2009 to 2.6 per cent, down from three per cent in March and said the GDP will grow by 0.7 per cent in 2010.
In his speech at the International Economic Forum of the Americas on June 11 Bank of Canada governor Mark Carney repeated his commitment to keep the key interest rates low into 2010. The Bank of Canada also recently announced it would extend the use of its temporary facilities to boost financial market liquidity until early next year as opposed to introducing new measures.
OECD pointers could keep variables low for longer
Friday, July 3, 2009
Why are rates not coming back down?
Good Morning!
As we’ve seen the spreads on the bond yields increase, the question of “when are rates coming down?” has been asked a lot!
Earlier in the year when volumes were low, volumes for the banks were also low. During Spring Market the race for obtaining 2009 market share was on! Profitability was taking a back seat to market share and we saw very competitive rates from the banks. They were treating a mortgage as a loss leader to get that client in the door. Some also had extra deposit money from RRSP season to lend out.
Now into the third quarter of 2009, profitability is again top of mind. Remember year end for the banks is Oct 31. They only have 4 months left to hit their revenue targets.
Therefore, we are now seeing banks hanging onto this higher spread for as long as they can….there may be some movement soon, but banks are ensuring bond prices stay consistent before they make a move.
If rates change-you will be the first to know!
Good Morning!
As we’ve seen the spreads on the bond yields increase, the question of “when are rates coming down?” has been asked a lot!
Earlier in the year when volumes were low, volumes for the banks were also low. During Spring Market the race for obtaining 2009 market share was on! Profitability was taking a back seat to market share and we saw very competitive rates from the banks. They were treating a mortgage as a loss leader to get that client in the door. Some also had extra deposit money from RRSP season to lend out.
Now into the third quarter of 2009, profitability is again top of mind. Remember year end for the banks is Oct 31. They only have 4 months left to hit their revenue targets.
Therefore, we are now seeing banks hanging onto this higher spread for as long as they can….there may be some movement soon, but banks are ensuring bond prices stay consistent before they make a move.
If rates change-you will be the first to know!
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