April 23 2008 - As anticipated, today's prime rate has gone down from 5. 25% to 4.75 % -- a half a percent decrease. This is yet another aggressive decrease, placing us at record low interest rates. See April 22, 2008 press release below:
Bank of Canada lowers overnight rate target by 1/2 percentage point to 3 per cent
OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-half of a percentage point to 3 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 3 1/4 per cent.
Growth in the global economy has weakened, reflecting the effects of a sharp slowdown in the U.S. economy and ongoing dislocations in global financial markets. Growth in the Canadian economy has also moderated as buoyant growth in domestic demand, supported by high employment levels and improved terms of trade, has been substantially offset by the fall in net exports. While both total and core CPI inflation were running at about 1.5 per cent at the end of the first quarter, the underlying trend of inflation is judged to be about 2 per cent, consistent with an economy that was operating just above its production capacity.
The Bank is now projecting a deeper and more protracted slowdown in the U.S. economy. This has direct consequences for the Canadian economic outlook, with declining exports projected to exert a significant drag on growth in 2008. In addition, tightening credit conditions and softening sentiment are expected to moderate business investment and consumer spending. Nevertheless, domestic demand is projected to remain strong, supported by firm commodity prices, high employment levels, and the effect of cumulative easing in monetary policy.
The Bank projects that the Canadian economy will grow by 1.4 per cent this year, 2.4 per cent in 2009, and 3.3 per cent in 2010. Consistent with this growth profile, the economy moves into excess supply in the second quarter of 2008, and spare capacity continues to increase through early next year. However, a gradual recovery in the U.S. economy, a return to more normal credit conditions, and accommodative monetary policy should generate above-potential growth and bring the economy back into balance around mid-2010.
The recent price-level adjustments for automobiles and the effect of past changes in indirect taxes will keep measured inflation below target through 2008. The emergence of excess supply in the economy should keep downward pressure on inflation through 2009. Both core and total inflation are projected to move up to 2 per cent in 2010, as the economy moves back into balance. There are both upside and downside risks to the Bank's new projection for inflation; these risks appear to be balanced.
In line with this outlook, some further monetary stimulus will likely be required to achieve the inflation target over the medium term. Given the cumulative reduction in the target for the overnight rate of 150 basis points since December, the timing of any further monetary stimulus will depend on the evolution of the global economy and domestic demand, and their impact on inflation in Canada.
A full analysis of economic and financial developments, trends, and risks will be set out in the Bank's Monetary Policy Report, to be published on 24 April 2008.
Information note: The Bank's next scheduled date for announcing the overnight rate target is 10 June 2008.
April 14, 2008 - KEVIN CARMICHAEL, Globe and Mail
More rate cutting likely, central bank head indicates
WASHINGTON — The Bank of Canada Governor said he's worried the country's credit markets will get tighter, an indication that he will again cut interest rates later this month.
While it's easier to get a loan in Canada right now than it is in the United States, there's a risk lenders will restrict capital and increase borrowing charges as the global credit crunch persists, Mark Carney said in an interview.
“Prospectively, there is reason to expect tightness,” Mr. Carney said in Washington after attending a meeting of the 185-member International Monetary Fund.
“We have to make policy on a forward-looking basis.”
The remarks help explain why the central bank is cutting interest rates even as Canada's domestic economy remains robust amid a global economic slowdown sparked by the collapse of U.S. housing and credit markets.
Mr. Carney and his deputies on the bank's policy-setting governing council slashed their benchmark interest rate by a half-point to 3.5 per cent last month and indicated further cuts would be needed to keep the U.S. woes from further infecting Canada's economy. So far, Canada's banks are weathering market turmoil that the IMF estimates will result in global financial losses approaching $1-trillion (U.S.).
The country's factories are having a harder time. Exports declined in the fourth quarter because of weaker demand from the U.S., which accounts for about three-quarters of Canada's shipments abroad.
With exporters struggling, the Bank of Canada must do whatever it can to keep banks lending, said Mark Chandler, a fixed-income strategist at RBC Dominion Securities in Toronto.
“Chartered banks are taking capital charges that restrict their ability to lend,” Mr. Chandler said in an e-mail. “Canada's case is less extreme, but it is still the case that banks are wary of lending to one another globally, that they must be conscious of protecting liquidity positions. Therefore the feed-through from official rate changes to overall monetary conditions is dampened.”
Canada's monetary-policy makers next set interest rates on April 22 and will update thinking on the economy in the central bank's Monetary Policy Report two days later.
With inflation below the Bank of Canada's target of 2 per cent in February, economists predict Mr. Carney will reduce the benchmark overnight rate between commercial banks another three-quarters of a point before the second quarter ends in June, according to the median estimate of 14 analysts surveyed by Bloomberg News.
“There is more easing to come for sure,” Mr. Chandler said. “The ebb and flow of credit news will dictate whether they are pieced out in 50-basis-point or 25-basis-point increments.” Mr. Carney heard little in Washington to suggest economic prospects would improve any time soon.
On Friday, the Group of Seven finance ministers and central bank governors conceded they had misjudged the severity of the credit crisis, saying “near-term global economic prospects have weakened.” The IMF cut its forecast for economic growth this year to 3.7 per cent from almost 5 per cent in 2006 and put the odds of global recession at 25 per cent.
The 24-member committee of finance ministers and central bank governors that guides the IMF's work said in a statement after a meeting on Saturday that “growth prospects for 2008 and 2009 have deteriorated.” Mr. Carney declined to discuss the economy in detail, saying he and the central bank's other policy makers still are forming their opinions ahead of next week's interest rate announcement.
Key to the decision will be the Bank of Canada's assessment of U.S. consumers.
Consumption in the U.S. in recent years was fuelled by rising home prices, which made consumers feel wealthier. Easy credit allowed them to refinance their mortgages, leaving them with cash to refurbish their homes, buy cars and take vacations.
Mortgage rates now are higher, and it has become more difficult for riskier borrowers to get loans and the middle class to take out so-called jumbo mortgages.
At the same time, the U.S. labour market remains fairly strong and wages are rising.
Mr. Carney said he will be watching carefully to see how much U.S. consumers will buy with only their paycheques and savings accounts to finance purchases.
March 17, 2008 ROMA LUCIW, Globe and Mail
TSX tumbles, U.S. pares losses
Canada's benchmark equity index tumbled during a panicky Monday trading session after the U.S. central bank delivered an emergency discount rate cut just two days before a scheduled meeting, and JPMorgan Chase & Co. moved to buy Bear Stearns Cos. Inc. for the bargain-basement price of $2 (U.S.) a share.
Andrew Martyn, a vice-president at Toronto money manager Davis-Rea, said heightened anxiety from the near collapse of Bear Stearns shows how rapidly bad lending practises can attack the capital of what seemed to be a venerable company.
“You would have to go back a long time in memory to see these kinds of quakes in markets, you see them maybe once a decade,” he said in an interview. “This is a decade-type event...it shakes everyone to the core.”
In Toronto, the S&P/TSX composite index plunged more than 400 points before closing at 12,952.15, down 300.69 points, its biggest one-day drop in nearly two months.
European and Asian stock markets also slid as investors reacted to the increased global turmoil in credit markets, but U.S. equities recovered from early losses and finished Monday's session mixed as investors looked to Tuesday's U.S. Federal Reserve's rate-setting meeting.
Financial stocks led the losses on the TSX, with Royal Bank of Canada falling 2.64 per cent on fears that far from being over, the U.S. mortgage crisis is only heating up and that its tentacles will extend further into the Canadian financial space. Canadian Imperial Bank of Commerce stock lost 4.94 per cent while Bank of Montreal fell 2.54 per cent.
Mr. Martyn said there is concern that Canadian financial institutions may run into liquidity woes in the next week, a situation that could force them to merge.
“If they can not re-liquefy their balance sheets and need to, then they are in trouble,” he said. “So it is not inconceivable that in this cycle, one of the top six banks goes and merges with another one. Probably a forced merger.”
A story in the Wall Street Journal said that Royal Bank of Canada was one of a number of potential buyers of Bear Stearns. However, Canada's biggest bank said Monday that it had not engaged in serious negotiations for the company.
Instead, the 85-year old investment bank was bought by JPMorgan for $236-million, a fraction of its $20-billion market value in January, 2006, in order to prevent its collapse. The Federal Reserve agreed to backstop the financing for the deal. JPMorgan shares were one of the few risers Monday, jumping 10.32 per cent while Bear Stearns stock plummeted 83.97 per cent.
“The credit crisis and its aftermath seem to have claimed its biggest victim with Bear Stearns collapsing into the arms of JPMorgan,” said Citigroup equity strategist Tobias Levkovich. “Yet, we suspect that investors remain fearful that other weaker securities firms could follow this path, with extreme concern over financial institutions now.”
Shares of Lehman Brothers Holdings Inc. sank 19 per cent, while Goldman Sachs Group Inc. lost 3.72 per cent.
The gains by JP Morgan helped the Dow Jones Industrial Average pare losses and close 21.16 points higher at 11,972.25. The other U.S. indexes did not fare as well, with the S&P 500 shedding 11.54 to 1,276.60 while the Nasdaq composite dropped 35.48 to 2,177.01.
According to Mr. Martyn, Canadian market losses were larger than in the U.S. because in their bid for liquidity, investors were selling resource stocks. He pointed out that the energy, mining and metal sectors had by and large escaped the recent selloff in the financial sector.
Oil hit a record $111.80 a barrel early on Monday before reversing course and dropping $4.53 to $105.68 amid worries over the outlook for the U.S. economy. Not to be outdone, gold also touched new highs, rising to $1,033.90 an ounce. The U.S. dollar, meanwhile, plunged to record lows against the euro.
Although central banks were scrambling to contain the damage, the financial crisis clearly had markets on edge and bracing for further trouble.
“We are in the midst of the most pervasive financial crisis in a generation, which has destroyed untold sums of wealth in housing and financial assets and has driven the U.S. economy into recession,” said Sherry Cooper, the chief economist at BMO Capital Markets.
Financial shares have dropped to near five-year lows because investors are not convinced the Fed will be able to keep credit-market losses from spreading. “The Fed's primary role right now is as lender of last resort. They will ignore for the moment the effects of their actions on inflation or the moral hazard of bailouts. The Fed is in emergency mode,” Ms. Cooper said.
Late on Sunday, the U.S. Federal Reserve delivered an inter-meeting cut in its discount rate — the one that helps determine the price at which financial institutions can access credit - to 3.25 per cent from 3.5 per cent. The Fed also offered to lend money to a number of firms.
The Bank of Canada did not make any moves on Monday, but said that it was watching the situation. “The Bank of Canada continues to monitor financial market developments closely,” spokesman Jeremy Harrison said.
The Fed's move, which comes just a day before a scheduled rate meeting, prompted speculation that the U.S. central bank will chop its key interest rate by a full percentage point on Tuesday.
Mike Englund of Action Economics said he expects “a jumbo Fed easing this week to help ease the heightened degree of panic” coursing through markets, along the lines of 100 basis points.
“For the Fed, the focus has shifted from broad monetary policy considerations to the more immediate ‘lender of last resort' role for the central bank, and we assume that the Fed will do what it thinks is necessary to achieve market stability,” Mr. Englund said.
The Fed would likely prefer a globally co-ordinated interest rate reduction, he said. If they could negotiate one, it would likely be publicized separately from the Federal Open Market Committee (FOMC) meeting statement, as was the case with the TAF (Term Auction Facility ) announcement in December.
“Presumably the Fed would seek such action in advance of the FOMC statement,” Mr. Englund said. “The action taken will likely be highly sensitive to how the market trades through today and tomorrow.”
With a file from reporter Heather Scoffield.
12 Feb 2008, National Post
Real estate affordability to improve, experts say
Housing affordability is likely to improve this year as house-price growth eases and falling interest rates make mortgages cheaper, economists say.
Michael Gregory, senior economist at BMO Capital Markets, said housing affordability was becoming an increasingly important issue in some Canadian cities, with house prices jumping at "unsustainable" levels amid a surge in population-driven demand, a strong jobs market and relatively low mortgage costs.
In Saskatoon, the cost of a new house skyrocketed an amazing 45.1% in 2007, while prices were up 25.9% in Regina and 21.5% in Edmonton, Statistics Canada figures showed yesterday.
Prices were up 4.1% in Montreal, 6.4% in Vancouver, 6% in Calgary and 3.4% in Toronto and Oshawa over the year.
Nationally, new house prices rose a healthy 6.2% last year, but were down considerably from the 12.1% annualized pace posted in August as supply closed in on demand.
While new home prices should remain strong in 2008, the pace of growth will continue to moderate to about 2% to 3%,Mr. Gregory said.
The slower pace of growth is already evident in the market as newhome prices increased only 0.1% in December, well below the average monthly increase of 0.5% in 2007.
"The key thing is the last few months have been quite subdued in terms of the monthly increases, at least the trend has been, and if that continues, we'll probably have subdued home-price inflation going forward," Mr. Gregory said.
"The market has a way of cooling itself. Alberta had just got so expensive that people stopped moving there. Eventually supply catches up to demand, and that's what happened in Calgary," he said.
He said existing home prices, due on Friday, should also show signs of easing, with both segments of the market slowing further in 2009.
Rishi Sondhi, economist at RBC Capital Markets, said housing should become more affordable as house-price gains ease and interest rates fall, with the Bank of Canada expected to cut interest rates again in March following a 25-basis-point cut to 4% in January.
Some economists expect rates to reach as low as 3% by mid-year.
Mr. Sondhi said the moderation in house-price growth was placing less pressure on inflation, leaving the door open for the Bank of Canada to cut interest rates to prevent a significant economic slowdown.
Larry Stewart, broker and owner of RE/MAX Saskatoon, said the sharp rise in the city's house prices in 2007 was driving more people, particularly first-time home buyers, into cheaper high-density living, such as condominiums.
"That's filling the gap for the newhome buyer [who] can't afford to get into the market with increased house prices," Mr. Stewart said, adding that prices in Saskatoon would likely rise a further 20% in 2008.
However, Mr. Stewart said aggressive competition between mortgage companies was helping younger people to get into the market, offering, for example, loans equal to 100% of the value of a home.
Condominium sales have been surging across Canada, particularly in such high-density city areas as Toronto, where condo sales accounted for 52% of all new-home sales in 2007, according to figures from N. Barry Lyon Consultants and RealNet Canada.
22 Feb 2008, The Vancouver Province
Growth healthy, if more moderate; 'Never before have we seen such a continuous runup'
TORONTO -- Real-estate markets across Canada posted solid gains over the past decade, and the economic fundamentals remain in place for continued but more moderate growth, real-estate broker Re/Max said yesterday. Between 1997 and 2007, average home prices in Canada almost doubled, to $307,265 in 2007 from $154,606 in 1997, a 7.1-per-cent annually compounded rate of return, Re/Max said.
The number of homes sold nationally rose over 57 per cent to more than 500,000 last year from 331,092 in 1997.
"Never before have we seen such a continuous runup in Canadian real estate,'' Michael Polzler, an executive vice-president at Re/Max, said.
Low interest rates, a robust job market, and strong consumer confidence were all credited as drivers.
Immigration and domestic migration to tap Western Canada's booming economy also helped lift demand, the report said.
Real estate considered cheap by international standards attracted droves of U.S., European, Middle Eastern and Chinese buyers to the Canadian market over the past decade, according to Re/Max.
The booming energy sector in Western Canada drew job seekers from across the country to that region, helping the housing market lead the way in terms of growth.
"Given the continuation of sound economic fundamentals, it's expected that residential real-estate markets across the country will continue to experience healthy activity, albeit at a more moderate pace,'' the report said.
In its 2008 housing outlook, released in the fall, Re/Max said it expected the domestic market to stay strong, but the red-hot growth seen in 2007 would likely cool some, partly due to the economic slump south of the border.
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