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Wednesday, July 21, 2010

BANK of CANADA RAISES INTEREST RATE

The Bank of Canada did as expected yesterday and announced it is increasing the target for the overnight rate by 0.25% to 0.75%. There was some debate earlier in the month whether the central bank would actually continue increasing interest rates, but after the strong job report that was released mid-month announcing that a record number of jobs were created in June, it became apparent that Bank Governor Mark Carney, now had strong justification to increase rates again.

Some key items in the release included:

Globally
Global economic recovery is proceeding but is not yet self-sustaining
Greater emphasis on balance sheet repair by households, banks, and governments around the world is expected to reduce global growth then the Bank originally believed back in April
The response to the European debt crisis, or Greece’s debt crisis, has reduced the risk of it blowing out of proportion, but it will slow down global growth
US consumer demand is increasing but is still not driving growth
In Canada
Economic activity in Canada is proceeding largely as expected mainly due to government stimulus and consumer spending
Housing activity is declining markedly from high levels, as the Bank believes that ultra low interest rates brought forward housing demand from this year into late last year and earlier in 2010, so we could see a continued slow down through the rest of the year
Despite the latest jobs report for June 2010 stating that employment growth has resumed, business investment still has resumed to previous levels as there is so much global uncertainty at the moment
The Bank of Canada expects economic recovery in Canada to be slower than originally thought in April, and is now expected as follows:
2010: 3.5%
2011: 2.9%
2010: 2.2%
Inflation seems to be under control, and is expected to remain around the target 2%, however, they will keep an eye on whether HST introductions in BC & Ontario will lead to inflation in the short term
The economy is expected to recover to full capacity towards the end of 2011 rather than Q2 2011 as thought in April
They then closed the announcement with a warning that:

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.

This means that another rate hike at the next meeting on September 8th, 2010, is not guaranteed. They will have to see how the Canadian economy is fairing along with the rest of the world, and some economists believe they may ‘pause’ rate hikes to see the effects of previous increases thus far.

What this means for variable mortgage holders, is that your variable mortgage rates will increase by 0.25% tomorrow.

Keep in mind that the Bank of Canada’s key interest rate doesn’t directly affect fixed mortgage rates, they’re affected by bond yields, and after the last announcement we actually saw fixed mortgage rates come down as bond yields decreased.

Thursday, July 8, 2010

CANADA'S ECONOMY OUTPACING THE US

IMF says Canada will likely outperform this year, sees slower growth in 2011
Thu Jul 8, 9:57 AM
Joe Mcdonald, The Associated Press
Email StoryIM StoryPrintable View.By Joe Mcdonald, The Associated Press

BEIJING, China - Canada's economy is on track to grow more quickly this year than previously expected, putting it ahead of the United States and most other advanced economies, according to new estimates from International Monetary Fund.

The IMF said Thursday it's raising the 2010 growth forecast for Canada to 3.6 per cent from its previous estimate of 3.1 per cent, issued in April.

The IMF's July report also raised its U.S. growth estimate to 3.3 per cent, up from 3.1 per cent and its world estimate to 4.6 per cent from 4.2 per cent.

Asian countries with rapidly maturing economies will grow more quickly than the United States, Japan and European countries that have historically been more advanced.

China's growth for this year, for instance, is now projected at 10.5 per cent, up five percentage points, while the IMF expects India's economy will advance 9.4 per cent this year (up six percentage points from the April projection.)

Next year isn't looking so rosey for Canada, however.

The IMF has lowered its projection for 2011 growth by four percentage points to 2.8 per cent. Also notable was a reduction in the IMF's 2011 projection for China, which has been reduced by three percentage points from April's.

In contrast, the U.S. growth projection for next year was raised by three percentage points to 2.9 per cent, slightly ahead of Canada, while the world outlook for 2011 was raised by eight percentage points to 4.3 per cent.

The IMF, a Washington-based multnational organization affiliated with the United Nations and the World Bank, said Europe's debt crisis might stall the global rebound and governments need to shore up shaky public confidence.

Its quarterly World Economic Outlook warned that "risks have risen sharply" and Europe has to quickly resolve debt problems and restore confidence in its banks.

Europe's problems "could spill over to other regions and stall the global recovery," said Jose Vinals, director of the fund's monetary and capital markets department, at a news conference in Hong Kong.

"Further credible and decisive policy action is needed to resume progress on financial stability and keep the economic recovery on track," Vinals said.

Risks so far are limited to financial markets and activity in other fields stabilized at a high level in May, the IMF said. It said industrial output and trade grew by double digits and there was a modest but steady recovery in developed economies and strong growth in emerging nations.

"The numbers for economic activity have come in strong — in fact, stronger than we have forecast," said Olivier Blanchard, director of the IMF's research department.

The fund raised this year's U.S. growth forecast from 2.7 per cent to 3.3 per cent. The outlook for Germany and other European nations that use the euro common currency was unchanged at 1 per cent.

A global "double dip," or relapse into recession, is "very unlikely," Blanchard said.

Asian economies recovered strongly this year, driven by buoyant exports and stronger domestic demand, the IMF said.

The fund raised its 2010 growth forecast for Japan to 2.4 per cent from 1.9 per cent and for India to 9.4 per cent from 8.8 per cent. The estimate of the Asia region's growth rose to 7.5 per cent from seven per cent.

However, it warned that weakness in Europe "would affect Asia through both trade and financial channels."

Weak data from major economies in recent weeks have diminished confidence in a strong rebound from last year's recession.

The fund's forecast for 2011 growth was unchanged at 4.3 per cent, a decline from this year's rate.

In a move that might fuel concern the recovery is fading, the fund lowered its 2011 growth forecast for Japan from two per cent to 1.8 per cent and for Britain to 2.1 per centfrom 2.5 per cent.

In Europe, the IMF said governments must resolve uncertainty about banks' exposure to sovereign debt and other risks and make sure lenders have enough capital and markets have adequate liquidity.

It said many advanced economies urgently need to push ahead financial reforms including recapitalizing banks, restructuring and consolidating banking industries and overhauling regulation.

"In the absence of complete banking sector recapitalization and restructuring, the flow of credit to the economy will continue to be impaired," the IMF said.