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Bank of Canada expected to hike interest rates in mid-2010
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TORONTO — The Bank of Canada repeated its pledge Tuesday to keep interests rates at historic lows until the middle of next year to stimulate growth and a sense of stability in the midst of a slow economic recovery.
But, economists are calling for rate hikes as much as a full percentage point or more later next year, and say the bank’s commitment to keep its key rates at 0.25 per cent creates a false sense of security in borrowers who have taken on debts larger than they could normally afford.
The C.D. Howe Institute’s 12-member monetary policy council’s median target for the overnight rate was for one per cent in the second half of 2010.
The council said the central bank should give a strong signal that when the overnight rate moves up, it may be quick and large. They also suggested the bank rein in the housing market by raising the required down payment on government-insured mortgages.
C.D. Howe president and CEO William Robson says a rapid rise in interest rates expected late next year could prove devastating for homeowners who have not evaluated their ability to carry their mortgage at a higher interest rate.
The central bank announced Tuesday the global economy has been slightly more positive than it was at the time of the bank’s October pronouncement, but added “significant fragilities remain.”
The economy grew less than analysts expected in the third quarter and inflation has been slightly higher than the central bank expected.
Diana Petramala, an economist at TD Bank, said as long as those fragilities remain, the Bank of Canada will not be swayed to move quickly with interest rate hikes.
She said TD believes there is more risk associated with the combination of a mild U.S. recovery and strengthening Canadian dollar than the central bank has outlined.
Petramala said the bank’s projection for three per cent growth in 2010 is slightly more optimistic than TD’s forecast of 2.7 per cent growth, adding that she believes the Bank of Canada’s first rate hike will not come until the fourth quarter of next year.
Dawn Desjardins, assistant chief economist at RBC Economics, said still volatile markets and global market uncertainties suggest a significant change to the central bank’s policy is premature.
Given the still-fragile global economy, she said, Canada’s growth rate in 2010 will likely fall short of those recorded during the early stages of past recoveries.
Desjardins added that if the economy continues to build momentum by next summer, the bank will likely hike the rate by one percentage point for the second half of next year.
Michael Gregory, a senior economist at BMO Capital Markets, said there was a faintly more hawkish tone in the bank’s announcement.
“The combination of higher-than-projected global growth and domestic core inflation is a shade more hawkish no matter what prism you’re looking through,” he said.
“The bank is on hold until the end of June, but come next Canada Day the bank will be hoisting its hawkish colours amid all the Canadian flags.”
The Canadian Press
Wednesday, December 9, 2009
Tuesday, December 8, 2009
Financial Update For Dec. 8, 2009
Economic recovery is 'solidly entrenched': BoC
Paul Vieira, Financial Post
OTTAWA -- After months of uncertainty, the economic recovery now appears to be "solidly entrenched," the Bank of Canada said Tuesday, indicating its forecast for growth should unfold as envisaged.
Still, in its latest interest rate announcement, the central bank reiterated, as expected, its conditional commitment to keep its key policy rate at a record low 0.25% until June 2010 as inflation is still not expected to hit its preferred 2% target until the second half of 2011.
Recent data – from retail sales to a stunningly strong jobs report for November -- have painted a mostly cheer picture of the Canadian economy, analysts say, even though third-quarter GDP growth of 0.4% annualized came in well below the central bank's 2% expectation.
Since the central bank's latest economic forecast in October, "global economic developments have been slightly more positive and the global outlook has improved modestly," the bank's governing council said in its statement, adding though that "significant fragilities" remain.
The central bank said the composition of economic growth is unfolding as expected, highlighted by a shift toward stronger domestic demand and less reliance on exports.
"The main drivers and the profile of the projected recovery in Canada remain consistent with the bank's [outlook]," it added. "The bank continues to expect economic growth to become more solidly entrenched over the projection period and inflation to return to the 2% target in the second half of 2011."
According to the central bank's outlook, Canada is expected to grow 3.3% this quarter, followed by expansion of 3% next year and 3.3% in 2011. Predictions for strong growth gained steam late last week when data indicated the Canadian economy added 79,000 jobs in November.
Further, the central bank on Tuesday played down the impact of the stronger dollar, even though it acknowledged it remained a key risk to its forecast, and "could act as a significant further drag" on growth and inflation. The stronger loonie, which has advanced as much as 25% this year against its U.S. counterpart, led to a surge in imports in the third quarter – resulting in net exports acting as a drag on the economy of roughly 5.3 percentage points.
Since the last rate announcement, however, the dollar has on average traded a couple of cents below the central bank's working assumption of a US96¢ loonie.
Most analysts were looking for any change in nuance in the bank's statement – in particular a hint or two that it might move before its conditional pledge to keep rates at a record low until June 2010 given the surge in domestic consumption as households take advantage of record low borrowing costs.
Instead, the central bank reiterated that its target rate of 0.25% "can be expected" to remain intact until the end of the second quarter of next year. The pledge is conditional on inflation hitting the 2% target in the third quarter of 2011, as the bank expects.
The last time the bank raised its key policy rate, to 4.5%, was in July of 2007 – and shortly afterward the first signs of the credit crisis emerged.
Some economists, such as Ryan Brecht of Action Economics, expect the central bank to begin hiking its policy rate, and aggressively, starting in the second half of next year.
In a note released Tuesday morning, Mr. Brecht, the firm's senior North American economist, said he envisaged the Bank of Canada raising its target rate by 175 basis points before December of 2010, for a policy rate of 2%, or "more normal levels." Still, that would be below the 3% level in September of 2008, when Lehman Bros. collapsed, or the 4.5% peak hit more than two years ago.
Financial Post
Paul Vieira, Financial Post
OTTAWA -- After months of uncertainty, the economic recovery now appears to be "solidly entrenched," the Bank of Canada said Tuesday, indicating its forecast for growth should unfold as envisaged.
Still, in its latest interest rate announcement, the central bank reiterated, as expected, its conditional commitment to keep its key policy rate at a record low 0.25% until June 2010 as inflation is still not expected to hit its preferred 2% target until the second half of 2011.
Recent data – from retail sales to a stunningly strong jobs report for November -- have painted a mostly cheer picture of the Canadian economy, analysts say, even though third-quarter GDP growth of 0.4% annualized came in well below the central bank's 2% expectation.
Since the central bank's latest economic forecast in October, "global economic developments have been slightly more positive and the global outlook has improved modestly," the bank's governing council said in its statement, adding though that "significant fragilities" remain.
The central bank said the composition of economic growth is unfolding as expected, highlighted by a shift toward stronger domestic demand and less reliance on exports.
"The main drivers and the profile of the projected recovery in Canada remain consistent with the bank's [outlook]," it added. "The bank continues to expect economic growth to become more solidly entrenched over the projection period and inflation to return to the 2% target in the second half of 2011."
According to the central bank's outlook, Canada is expected to grow 3.3% this quarter, followed by expansion of 3% next year and 3.3% in 2011. Predictions for strong growth gained steam late last week when data indicated the Canadian economy added 79,000 jobs in November.
Further, the central bank on Tuesday played down the impact of the stronger dollar, even though it acknowledged it remained a key risk to its forecast, and "could act as a significant further drag" on growth and inflation. The stronger loonie, which has advanced as much as 25% this year against its U.S. counterpart, led to a surge in imports in the third quarter – resulting in net exports acting as a drag on the economy of roughly 5.3 percentage points.
Since the last rate announcement, however, the dollar has on average traded a couple of cents below the central bank's working assumption of a US96¢ loonie.
Most analysts were looking for any change in nuance in the bank's statement – in particular a hint or two that it might move before its conditional pledge to keep rates at a record low until June 2010 given the surge in domestic consumption as households take advantage of record low borrowing costs.
Instead, the central bank reiterated that its target rate of 0.25% "can be expected" to remain intact until the end of the second quarter of next year. The pledge is conditional on inflation hitting the 2% target in the third quarter of 2011, as the bank expects.
The last time the bank raised its key policy rate, to 4.5%, was in July of 2007 – and shortly afterward the first signs of the credit crisis emerged.
Some economists, such as Ryan Brecht of Action Economics, expect the central bank to begin hiking its policy rate, and aggressively, starting in the second half of next year.
In a note released Tuesday morning, Mr. Brecht, the firm's senior North American economist, said he envisaged the Bank of Canada raising its target rate by 175 basis points before December of 2010, for a policy rate of 2%, or "more normal levels." Still, that would be below the 3% level in September of 2008, when Lehman Bros. collapsed, or the 4.5% peak hit more than two years ago.
Financial Post
Financial Update For Dec. 8, 2009
• TSX -21.17 as weighty energy shares fell alongside weaker oil prices
• DOW -1.21 a choppy session impacted by a strong dollar, falling oil and gold prices and comments from Fed Chairman Ben Bernanke that cooled higher interest rate worries.
• Dollar +.45c to 94.98cUS
• Oil -$1.54c to $73.93US per barrel.
• Gold -$5.50 to $1,164.00USD per ounce
"The economic assessment is likely to continue referencing improving conditions and expectations for more," said Eric Lascelles, chief economics and rates strategist with TD Securities. "While it is most likely that the Bank of Canada will reiterate its view that the risks to the inflation outlook are roughly balanced, we highlight the possibility that the risks themselves could be discussed more explicitly with reference both to the Canadian dollar's drag and the possibility of additional strength from domestic demand and housing."
Since the last rate announcement, the dollar has traded below the US96¢ level – or the value the central bank assumed the dollar would be trading at in its most recent Monetary Policy Report.
The jobs data certainly kicked off a fresh round of interest rate speculation, with more bullish analysts believing the Bank of Canada will move before its June 2010 deadline – a conditional date it set based on inflation meeting expectations. The central bank sets its key rate in the hope of generating inflation of 2%.
In its outlook released last week, the C.D. Howe Institute's monetary policy council suggested the central bank needed to emphasize its rate commitment is not set in stone.
"While some members thought the Bank of Canada should follow that course even at the cost of a larger-than-otherwise increase in the overnight rate after June, others thought that the bank needed to re-emphasize the conditional nature of the commitment, and the possibility that changed circumstances would warrant an earlier rise," said the council, made up of private-sector economists and academics.
• DOW -1.21 a choppy session impacted by a strong dollar, falling oil and gold prices and comments from Fed Chairman Ben Bernanke that cooled higher interest rate worries.
• Dollar +.45c to 94.98cUS
• Oil -$1.54c to $73.93US per barrel.
• Gold -$5.50 to $1,164.00USD per ounce
"The economic assessment is likely to continue referencing improving conditions and expectations for more," said Eric Lascelles, chief economics and rates strategist with TD Securities. "While it is most likely that the Bank of Canada will reiterate its view that the risks to the inflation outlook are roughly balanced, we highlight the possibility that the risks themselves could be discussed more explicitly with reference both to the Canadian dollar's drag and the possibility of additional strength from domestic demand and housing."
Since the last rate announcement, the dollar has traded below the US96¢ level – or the value the central bank assumed the dollar would be trading at in its most recent Monetary Policy Report.
The jobs data certainly kicked off a fresh round of interest rate speculation, with more bullish analysts believing the Bank of Canada will move before its June 2010 deadline – a conditional date it set based on inflation meeting expectations. The central bank sets its key rate in the hope of generating inflation of 2%.
In its outlook released last week, the C.D. Howe Institute's monetary policy council suggested the central bank needed to emphasize its rate commitment is not set in stone.
"While some members thought the Bank of Canada should follow that course even at the cost of a larger-than-otherwise increase in the overnight rate after June, others thought that the bank needed to re-emphasize the conditional nature of the commitment, and the possibility that changed circumstances would warrant an earlier rise," said the council, made up of private-sector economists and academics.
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