As expected prime has remained unchanged this morning. If you are on a variable rate mortgage, your payments will stay the same. But don't look for further rate cuts in Canada after today, said Douglas Porter, deputy chief economist with BMO Nesbitt Burns Inc. in a report to clients. "Due to persistent strength in wage growth, the relentless power of oil prices, the notable lack of further Canadian dollar strength and the fact that almost no other central bank looks poised to cut rates further, we believe that the rate-cutting fiesta of the past six months is about to take a prolonged siesta." Please enjoy the press release from this morning with the Banks deciding factors and contact me with any questions on your mortgage plan.
June 10 , 2008
Bank of Canada keeps overnight rate target at 3 per cent
OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 3 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 3 1/4 per cent.
Since the April Monetary Policy Report (MPR), economic developments have been broadly in line with expectations. However, the balance of risks to the Bank's April projection for inflation in Canada has shifted slightly to the upside. Although the composition of U.S. growth has not been favourable for demand for Canadian goods and services, overall, global growth has been stronger and commodity prices have been sharply higher than expected. At the same time, many of the downside risks to inflation identified in the April MPR have eased, while the evolution of credit conditions has been in line with expectations. The risk remains that potential growth will be weaker than assumed.
With the decline in first-quarter GDP, the Canadian economy is judged to have moved into excess supply, which is expected to increase this year. Consistent with the April MPR, the Bank continues to project that economic growth will pick up this year and accelerate in 2009, owing in part to a firming of U.S. demand and accommodative monetary policy in Canada.
If current levels of energy prices persist, total CPI inflation will rise above 3 per cent later this year. However, with the Canadian economy operating in excess supply, core inflation is expected to remain below 2 per cent through 2009. Both total and core inflation should converge on 2 per cent in 2010 as the economy returns to balance.
Against this backdrop, the Bank now judges that the current stance of monetary policy is appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 per cent inflation target. There continue to be important downside and upside risks to inflation in Canada, which the Bank will monitor closely.
Information note:
The Bank of Canada's next scheduled date for announcing the overnight rate target is 15 July 2008. The Bank will publish an updated projection for the economy and inflation, and its assessment of the risks, in the Monetary Policy Report Update on 17 July 2008.
May 5, 2008, JOHN PARTRIDGE, Globe and Mail
Inflation worries will drive interest rates higher: Rubin
Unrelenting upward pressure on food and energy prices will force the Bank of Canada to reverse course and start raising interest rates to combat inflation over the next year, a high-profile Bay Street economist says.
“While the Bank of Canada may still deliver another rate cut, reflation will compel it to raise interest rates by at least 100 [basis points] next year,” Jeff Rubin, chief economist and chief strategist at CIBC World Markets in Toronto said in a monthly report on portfolio strategy.
The central bank has cut its key overnight lending rate to 3 per cent, down by 1.5 percentage points since last fall.
What is more, Mr. Rubin said he now expects U.S. federal Reserve Board chairman Ben Bernanke, to stop their rate-cutting drive when the key U.S. rate hits 1.5 per cent, rather than 1.25 per cent as CIBC previously forecast.
The fed cut the benchmark federal funds rate by 25 basis points to 2 per cent last week, bringing to 325 basis points the cutting it has done since last summer in a bid to limit economic damage from the U.S. housing and credit crises. (A basis point is one one-hundredth of a percentage point.)
As a result of the consumer price index inflation rate being set to “almost double next year,” Mr. Rubin said the firm is exiting its over-weight position in bonds and moving two percentage points of weighting to equities and the other two points to cash. This leaves it with 55 per cent in stocks, 38 per cent in bonds and seven per cent in cash, he said in the report.
“Moreover, we anticipate that we will be moving further assets out of our fixed income portfolio, as well as shortening duration in that portfolio as our forecast of rising inflation pans out,” Mr. Rubin said, adding that markets will be “surprised at how rapidly” the central bank will be “compelled to take back” its rate cuts next year.
Within equities, Mr. Rubin said the firm is adding an additional percentage point to its already over-weight position in the energy sector, taking the total to 37.1 per cent.
It also is adding 0.5 percentage points to its weighting in the materials sector, taking the position to 20.4 per cent of the portfolio, with the additional weighting focused on agricultural chemicals.
To compensate, the firm is trimming utilities by 1 percentage point to 2.5 per cent, while cutting back the consumer staples weighting by half a point to 2.2 per cent, “particularly in food retailers and processors, whose margins are getting decimated by soaring food costs,” Mr. Rubin said.
April 25, 2008, HEATHER SCOFFIELD AND KEVIN CARMICHAEL, Globe and Mail
Carney warns rate relief will be slow to reach consumers
OTTAWA — Turmoil in global credit markets is hindering the Bank of Canada's efforts to reduce borrowing costs for individuals and companies.
In its latest assessment of the economy, the central bank warned that even if it continues to lower its benchmark rate, rates lenders charge on mortgages and loans may rise.
Commercial lenders are paying more to get credit themselves in markets that remain reluctant to share money, the Bank of Canada said in its Monetary Policy Report.
Since the credit crisis kicked off last summer, banks have recovered only about three-quarters of their increased borrowing costs by charging higher rates to their customers.
That's not likely to last, Governor Mark Carney said.
"We do expect that to ultimately be passed on ... unless their funding costs come down sharply," Mr. Carney said at a press conference.
The report reinforced economists' expectations that the bank will continue to lower rates to offset the impact of a deteriorating U.S. economy.
The central bank's acknowledgment that it can only do so much to keep borrowing costs low signifies a change in a relationship that many borrowers have come to take for granted over the past decade.
Most people assume that when the central bank cuts, their own variable-rate mortgages or commercial loans will fall by the same amount.
That relationship is breaking down because commercial banks can't access credit at the low rates available before the collapse of the U.S. subprime mortgage market last summer.
Many financial institutions were backing their loans with securities linked to those mortgages.
Those assets are now essentially worthless, leaving the banks that held them with weaker balance sheets and riskier bets to pay the yield on any bonds they issue to raise capital.
So even though the Bank of Canada has slashed its benchmark rate by 1.5 percentage points since December, the risk premium lenders are demanding is keeping the spread between the central bank's overnight target and other loans wider than under normal conditions.
Earlier this week, Canada's chartered banks had contemplated holding their prime lending rates steady instead of following the central bank with its half-percentage-point rate cut.
Each cut to prime slashes their own profits, which are already being squeezed by the global financial turmoil, but the banks also realized they would face a major public backlash if they refused to pass along the central bank cuts.
After nine hours of sitting on the fence after the central bank cut on Tuesday, the commercial banks eventually matched the cut.
The banks' prime rate is what they charge their best customers. The banks use prime as a benchmark for many other rates. So far, the cuts to prime have moved in lockstep with the central bank, but some other rates, such as five-year mortgages, haven't.
"There seems to be a larger risk premium in the market," said Dustin Reid, a currency strategist at ABN Amro in Chicago and a former foreign exchange trader at the Bank of Canada. "I don't know what the event would be to swing the pendulum back to the other side."
Still, lending rates in Canada haven't been as susceptible to the global credit crunch as in the United States and Europe, where hedge funds have collapsed and central banks have had to bail out lenders to save them from bankruptcy.
The central bank characterized Canadian banks' losses as "limited," and noted that financial institutions, businesses and households all have healthier balance sheets than elsewhere in the world.
"Certainly it's much better to be in Canada during this situation than it is to be in other major economies," Mr. Carney said.
Mr. Carney, a former Goldman Sachs investment banker, acknowledged that the financial market turmoil has diluted the traditional power of monetary policy to influence the direction of the economy.
"It reduces, on the margin, the impact," Mr. Carney said. "But there are many more channels through which monetary policy does have an impact," he said, pointing specifically to how interest rates can influence the exchange rate or long-term borrowing rates.
In order to offset the diluted impact of monetary policy, the central bank has had to cut its key interest rate more than traditionally would have been the case, Mr. Carney suggested.
"We've tried to take that into account in calibrating monetary policy."
With files from reporter Tara Perkins in Toronto
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