Monday, April 26, 2010

Bank of Canada maintains interest rates

Reiterates commitment to hold until end of second quarter of 2010
As was widely expected, the Bank of Canada held its benchmark overnight lending rate steady at 0.25 per cent at its setting on January 19th, 2010. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, remains at 0.5 per cent.
With the economic recovery under way, the Bank acknowledged that the outlook for global growth was “somewhat stronger” than it had predicted in October, but stressed that this was still very much dependent on “exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems.” The Bank did, however, remove its comment regarding “significant fragilities” in the global economy, which had featured prominently in the previous two announcements.
Economic growth in Canada turned positive in the third quarter, and is expected to have improved further in the fourth quarter, accompanied by an increase in total CPI inflation, and higher than expected core rate of inflation.
The Bank said it believes that the Canadian economy will have contracted 2.5 per cent 2009, though annual data is not yet finalized. The Bank had originally predicted a 2.4 per cent decline. The Bank also made some small changes to its forecast for this year and next. The Bank now sees economic growth of 2.9 per cent in 2010, down slightly from the 3.0 per cent projection in October.
For 2011, the forecast was upgraded to 3.5 per cent from 3.3 per cent last fall. The Bank said “the private sector should become the sole driver of domestic demand in 2011,” which is when government stimulus is set to expire.
The Bank named a number of factors supporting Canada’s economic recovery – policy support, increased confidence, improving financial conditions, global growth, and higher terms of trade. The Bank reiterated that the strong Canadian dollar and weak U.S. demand were the main drags on the Canadian economy. As a result, growth continues to be driven more by the domestic side and less by exports.
The Bank said that the profile for the recovery in Canada was still consistent with its October Monetary Policy Report, saying inflation would return to the 2 per cent target in the third quarter of 2011. Conditional on this outlook, the overnight rate can be expected to remain at its current level until the end of the second quarter of 2010.
The Bank noted that the risks to the inflation outlook remain unchanged from those outlined in the October Monetary Policy Report. Inflation could climb faster if global and domestic demand ends up being stronger than currently expected. By contrast, inflationary pressures would be held in check by a more protracted global recovery and persistent strength in the Canadian dollar.
While the Bank said it judged these risks to be roughly balanced, it noted that, since it cannot lower rates any further, the overall risk to the projection are tilted slightly to the downside.
“The Bank of Canada’s decision to leave rates on hold, until at least the second half of 2010, confirms the view that it’s still to early to even consider tapping the brakes on economic growth,” said CREA’s Chief Economist Gregory Klump. “While interest rates will eventually rise, the increases are likely to be small. The Bank recognizes that economic growth will rely on domestic demand once temporary government spending measures aimed at propping up economic growth expire. Raising interest rates too soon and by too much runs the risk of choking economic growth.”
As of January 19th, the advertised five-year conventional mortgage rate stood at 5.49 per cent. This is down 1.26 per cent from one year earlier, and stands 0.1 per cent below where it stood when the Bank made its previous interest rate announcement on December 8th.
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-client relationship.
“Copyright Canadian Real Estate Association. Reprinted with permission.”

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