OTTAWA, July 20 /JAC/ – The Bank of Canada today announced that it is raising its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent.

The global economic recovery is proceeding but is not yet self-sustaining. Greater emphasis on balance sheet repair by households, banks, and governments in a number of advanced economies is expected to temper the pace of global growth relative to the Bank’s outlook in its April Monetary Policy Report (MPR). While the policy response to the European sovereign debt crisis has reduced the risk of an adverse outcome and increased the prospect of sustainable long term growth, it is expected to slow the global recovery over the projection horizon. In the United States, private demand is picking up but remains uneven.

Economic activity in Canada is unfolding largely as expected, led by government and consumer spending. Housing activity is declining markedly from high levels, consistent with the Bank’s view that policy stimulus resulted in household expenditures being brought forward into late 2009 and early 2010. While employment growth has resumed, business investment appears to be held back by global uncertainties and has yet to recover from its sharp contraction during the recession.

The Bank expects the economic recovery in Canada to be more gradual than it had projected in its April MPR, with growth of 3.5 per cent in 2010, 2.9 per cent in 2011, and 2.2 per cent in 2012. This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada. The Bank anticipates that business investment and net exports will make a relatively larger contribution to growth.

Inflation in Canada has been broadly in line with the Bank’s April projection. While the Bank now expects the economy to return to full capacity at the end of 2011, two quarters later than had been anticipated in April, the underlying dynamics for inflation are little changed. Both total CPI and core inflation are expected to remain near 2 per cent throughout the projection period. The Bank will look through the transitory effects on inflation of changes to provincial indirect taxes.

Reflecting all of these factors, the Bank has decided to raise the target for the overnight rate to 3/4 per cent. This decision leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery.

Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

Last Updated: Tuesday, October 20, 2009 | 9:28 AM ET

CBC News

The Bank of Canada opted to keep its benchmark interest rate steady at 0.25 per cent on Tuesday.

“Recent indicators point to the start of a global recovery from a deep, synchronous recession,” the bank said in a statement accompanying the decision. “A recovery in economic activity is also under way in Canada,” the bank said.

Despite the burgeoning turnaround, the bank signalled that it was not yet time for a rate increase.

The bank loosely controls interest rates in the broader economy by setting the level at which lenders obtain money themselves. Central banks across the globe began aggressively cutting interest rates beginning late last year, in a desperate attempt to stimulate the economy.

As the international economy shows signs of turning the corner, there was some pressure to turn off the stimulus taps by raising rates and tightening the money supply.

Earlier in October, Australia did just that, becoming the first developed economy in the world to raise rates since the crisis began in late 2008.

‘‘There’s no way for the bank … to back away from that pledge”—CIBC economist Avery Shenfeld

But Canada’s central bank opted not to follow suit.

In its previous report, Bank of Canada governor Mark Carney went to great pains to emphasize that the bank’s commitment to maintain its overnight lending rate was “conditional”.

That proviso remains in place. “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 said Tuesday.

Effectively, the bank has offered no hints that it plans on changing course any time soon. “There’s no way for the bank to single out some individual feature of the economy to back away from that pledge [to hold rates at 0.25 per cent],” CIBC economist Avery Shenfeld said in a note.

The bank did, however, temper its expectations for economic growth during the next two years. The Canadian economy is projected to grow by three per cent in 2010 and 3.3 per cent in 2011, the bank now says.

Bank of Canada governor Mark Carney will have another opportunity to speak his mind later in the week, when the bank unveils its latest Monetary Policy Report on Thursday. That document should provide a more detailed breakdown of the Canadian economy.

If you signed a variable rate mortgage in the past year, it may be time to refinance again.

Many individuals who came up for renewal in the past year may have selected a variable rate as high as prime + 1%.

Look at this example of a client who is paying prime + .5%  on a $300,000 mortgage:

Mortgage = $300,000

Penalty to get out of the mortgage  = $2,062

Savings of .5% in 5 years in the new mortgage  = $7,038   (assuming a prime rate of 2.25% and an amortization of 25 years).

Net savings in 5 years after penalty = $4,976

The big news in the variable rate mortgage market is the decision of the Bank of Canada to hold prime at 2.25% until the end of the second quarter ( June 2010 ). This has given us for the first time a guarantee that there will be no movement of your variable rate mortgage. With offerings as low as 2.55%, there is a huge upside to look into these mortgages. With our new mandate to call on every anniversary coupled with the launch of our blog site, you will have better support than ever to help you manage this type of product and save years off your mortgage. Call me anytime to discuss. Here is a link to the bank of Canada announcement made in April.

 http://www.bankofcanada.ca/en/press/index.html