It appears that the possibility of increased rates is getting closer to becoming a reality – but not likely until mid-summer – if then.

Once again, opinions on this vary widely, but the ‘noise levels’ are increasing.

Bank of Canada boss calls country’s productivity record ‘abysmal’

Last Updated: Wednesday, March 24, 2010 | 3:00 PM ET Comments36Recommend16

CBC News

Bank of Canada governor Mark Carney appeared to send signals Wednesday intended to prepare Canadians for an increase in interest rates, spurred by concerns about inflation.

But there was nothing that suggested the bank will move earlier than the widely expected date of midsummer.

‘Core inflation has been slightly firmer than projected,’ Bank of Canada governor Mark Carney says. (Sean Kilpatrick/Canadian Press)

Inflation has been rising more than the bank expected, Carney acknowledged in a speech to a conference in Ottawa put on by the Canadian Association for Business Economics.

“Core inflation has been slightly firmer than projected,” he said.

The core inflation rate excludes more volatile prices for food and energy and is closely watched by the Bank of Canada in making decisions about whether to increase rates.

The bank lowered its overnight target interest rate last April to a record low 0.25 per cent and said it would more than likely keep it there until July of this year.

At the same time, it predicted the core rate would fall short of its target annual rate of two per cent until the second half of next year.

Core-rate increase higher than predicted

But Statistics Canada reported on Friday that the annualized core rate in February was 2.1 per cent, up from two per cent in January, and ahead of most economists’ predictions of 1.7 per cent.

On March 2, the bank reconfirmed its plans to hold off on any rate increase until the summer, but today Carney warned that this is conditional on the outlook for inflation. The bank will update that outlook in its next monetary policy report, to be released April 22.

Sal Guatieri, senior economist with BMO Capital Markets, told CBC News there’s nothing in Carney’s speech that suggests the bank is “itching” to raise interest rates.

“We think the bank is still committed to keeping interest rates on hold at least until the middle of this year but then will begin to gradually raise interest rates starting in July,” Guatieri said.

Countering the case for raising rates are concerns about high debt levels affecting Greece, Spain and Portugal, a U.S. housing market that continues to “wobble” and the prospect of the Canadian dollar reaching parity with the U.S. dollar this summer, Guatieri said.

Takes aim at productivity

Carney also took aim at Canadian businesses for failing to invest enough in productivity growth, the measure of the increase in value of goods and services produced by each working Canadian.

Describing Canada’s record as “abysmal,” he predicted that if the trend isn’t reversed, falling productivity could cost every Canadian $30,000 in income over the next decade.

He criticized business for not investing more in new technology and training, and the country for not putting more into in training workers to improve their skills with computers and communications technology.

Carney said Canadians are well educated but not in the areas where they could be most competitive internationally.

He also called for the country to foster more competition in the telecommunications, electricity, and retail industries.

Read more: http://www.cbc.ca/money/story/2010/03/24/carney-rates.html#ixzz0j7gean3r

http://www.theglobeandmail.com/report-on-business/economy/jim-flaherty-tightens-mortgage-rules/article1469432/

Last Updated: Monday, February 15, 2010 | 9:45 PM ET

Finance Minister Jim Flaherty will announce new rules Tuesday aimed at preventing homebuyers from getting into financial difficulty when mortgage rates rise, CBC News has confirmed.

Finance Minister Jim Flaherty is set to impose new rules aimed at preventing homebuyers from getting in over their heads with mortgage debt. (Fred Chartrand/Canadian Press)Sources say the measures will discourage reckless real estate speculation, such as borrowing heavily for an investment property that is not the investor’s primary residence. Flaherty is also set to deter households from taking on more mortgage debt than they can afford to repay when interest rates rise, as they are expected to do later this year.

The finance minister is also expected to discourage people from raising cash by refinancing their homes with larger mortgages — again because they may not be able to make the payments at higher interest rates.

The Canadian Press reports that Flaherty will implement a debt affordability or income test that applicants must pass to qualify for mortgages insured by the Canada Mortgage and Housing Corp.

There has been speculation that Flaherty might raise the minimum down payment on a home — now five per cent — and lower the maximum amortization period for mortgages — currently 35 years.

Sources have told CBC News that those measures are not part of Tuesday’s announcement. However, they could be considered in the future.

Economists and policy-makers have expressed concern that very low interest rates have encouraged Canadians to take on too much debt.

In the case of home mortgages, there are fears that rising rates would force people to walk away from properties they could no longer afford — as happened in parts of the U.S. in 2007 and 2008 — flooding the market with homes for sale and causing prices to collapse.

With files from The Canadian Press
Read more: http://www.cbc.ca/canada/story/2010/02/15/flaherty-mortgage-rules.html

Bank of Canada stands pat at 0.25%

Last Updated: Tuesday, January 19, 2010 | 9:41 AM ET

CBC News

Governor of the Bank of Canada Mark Carney held the bank’s benchmark lending rate steady at 0.25 per cent on Tuesday. (Richard Lam/Canadian Press)

The Bank of Canada kept its benchmark lending rate at 0.25 per cent Tuesday, reiterating its conditional commitment to hold rates steady until the middle of 2010.

Although it held the overnight lending rate steady, the bank did acknowledge that the recovery appears to be proceeding at a better pace than it was anticipating.

“While the outlook for global growth through 2010 and 2011 is somewhat stronger than the bank had projected in its October monetary policy report, the recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems,” the bank said in announcing the rate decision.

The Canadian economy grew by a tepid 0.1 per cent in the third quarter, Statistics Canada reported last month. But that “is expected to have picked up further in the fourth quarter,” the bank said.

The Bank projects that the economy will grow by 2.9 per cent in 2010 and 3.5 per cent in 2011, after contracting by 2.5 per cent in 2009.

In its statement, the bank repeated its mild concern over the risk that the elevated Canadian dollar presents to the recovery.

“The persistent strength of the Canadian dollar … continues to act as a significant drag on economic activity in Canada,” the bank said.

The bank is set to release its next decision on interest rates on March 2.

Noteworthy Article from this morning’s Province newspaper.

Bank of Canada maintains overnight rate target at 1/4 per cent and reiterates conditional commitment to hold current policy rate until the end of the second quarter of 2010

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/4 per cent. The Bank Rate is unchanged at 1/2 per cent and the deposit rate is 1/4 per cent.

While significant fragilities remain, global economic developments have been slightly more positive and the global outlook has improved modestly relative to the Bank’s projection in its October Monetary Policy Report (MPR).

In Canada, as expected, the composition of aggregate demand is shifting towards final domestic demand and away from net exports. In the third quarter, the balance of these shifts resulted in weaker-than-projected GDP growth. Core inflation in recent months has been slightly higher than the Bank had projected, although total CPI inflation remains close to projections.

The main drivers and the profile of the projected recovery in Canada remain consistent with the Bank’s views in the October MPR. The Bank continues to expect economic growth to become more solidly entrenched over the projection period and inflation to return to the 2 per cent target in the second half of 2011.

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. In its conduct of monetary policy at low interest rates, the Bank retains considerable flexibility, consistent with the framework outlined in the April MPR.

The risks to the outlook for inflation continue to be those outlined in the October MPR. On the upside, the main risks are stronger-than-projected global and domestic demand. On the downside, the main risks are a more protracted global recovery and persistent strength in the Canadian dollar that could act as a significant further drag on growth and put additional downward pressure on inflation. The Bank views all of these risks through the prism of achieving the 2 per cent inflation target.

While the underlying macroeconomic risks to the projection are roughly balanced, the Bank judges that, as a consequence of operating at the effective lower bound, the overall risks to its inflation projection are tilted slightly to the downside.

Information note:

The next scheduled date for announcing the overnight rate target is 19 January 2010. A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the Monetary Policy Report on 21 January 2010.

See our Bank of Canada link under ‘Links’ and view this article under Publications and Research>Press Releases.

| Monday, 26 October 2009

While variable-rate mortgages continue to beat out fixed-rates when it comes to cost savings, the gap between the two is likely to become closer due to the economic environment, a new bank report says.

“Fixed rates were advantageous during only two recent periods – through the late 1970s and briefly in the late 1980s; in both cases, ahead of a period of rising interest rates, as is the case now,” the report by BMO economists Douglas Porter and Benjamin Reitzes said.

Variable rate products have proven the better option 82 per cent of the time since 1975, Porter and Reitzes wrote, and forecast that variables will continue to remain cheaper than fixed rate mortgages. This is in part due to the rising Canadian dollar, which has reduced the Bank of Canada’s short-term need to raise the key interest rate.

On the other side, the report argued the economic recovery – and the expected rise in interest rates next year – has potentially caused “one of those rare periods when a fixed rate turns out to be the superior choice.” It also pointed out that negotiated rates (as opposed to posted rates) make fixed and variable products closer to call.

VICTORIA, British Columbia – While there are renewed signs of economic growth in Canada and around the world, Bank of Canada Governor Mark Carney urged today that this initial success should not give way to complacency.

“The recovery is in its earliest stages and almost entirely driven by public policy,” Governor Carney said, noting that the coordinated worldwide response to the global financial crisis and economic collapse was both ambitious and unprecedented. “In effect,” he said, “there was wartime spending on a peacetime calamity.”

For the recovery to take hold in a sustained fashion, a difficult hand-off from public- to private-led growth must occur over the medium term, the Governor said in a speech delivered to the Greater Victoria Chamber of Commerce. “Over the longer term, the economic environment will be challenging as the global economy undergoes a fundamental restructuring.”

This global recovery is likely to be protracted, Governor Carney warned. “We may be on the right track, but there is a long road ahead,” he said. Repair of major foreign financial systems remains a work in progress and it is important that private-sector demand grow consistently in the countries that were at the epicentre of the crisis, particularly the United States. Governor Carney cautioned that this may be both difficult and uneven.

“On balance, the external sector may not be reliable as the sole engine of the Canadian recovery,” Governor Carney noted. “In this context, domestic factors could prove decisive.” As the Canadian fiscal stimulus will largely be finished by next year, consumer and business spending will need to drive economic growth in Canada, he said.

In conclusion, Governor Carney reaffirmed the Bank of Canada’s commitment to price stability and to keeping inflation low, stable, and predictable. “The Bank’s sole monetary policy objective is to achieve its 2 per cent inflation target,” Governor Carney said, adding, “the single, most direct contribution that monetary policy can make to sound economic performance is to provide Canadians with confidence that their money will retain its purchasing power.”

Link to Bank of Canada press release:

 http://www.bankofcanada.ca/en/press/2009/pr280909.html