Bank of Canada Maintains Overnight Rate Target At 1/2 Per Cent

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

The global economy is progressing largely as the Bank anticipated in its January Monetary Policy Report (MPR). Financial market volatility, reflecting heightened concerns about economic momentum, appears to be abating. Although downside risks remain, the Bank still expects global growth to strengthen this year and next. Recent data indicate that the U.S. expansion remains broadly on track. At the same time, the low level of oil prices will continue to dampen growth in Canada and other energy-producing countries.

Prices of oil and other commodities have rebounded in recent weeks. In this context, and in light of shifting expectations for monetary policy in Canada and the United States, the Canadian dollar has appreciated from its recent lows. With these movements, both the price of oil and the exchange rate have averaged close to levels assumed in the January MPR.

Canada’s GDP growth in the fourth quarter was not as weak as expected, but the near-term outlook for the economy remains broadly the same as in January. National employment has held up despite job losses in resource-intensive regions, and household spending continues to underpin domestic demand. Non-energy exports are gathering momentum, particularly in sectors that are sensitive to exchange rate movements. However, overall business investment remains very weak due to retrenchment in the resource sector.

Inflation in Canada is evolving broadly as anticipated. The factors that pushed total CPI inflation up to 2 per cent will likely unwind in the months ahead. Measures of core inflation are at or just below 2 per cent, boosted by the temporary effects of past exchange rate depreciation. Material excess capacity in the Canadian economy will continue to dampen inflation.

An assessment of the impact of the upcoming federal budget’s fiscal measures will be incorporated into the Bank’s April projection. All things considered, the risks to the profile for inflation are roughly balanced. Meanwhile, financial vulnerabilities continue to edge higher, in part due to regional shifts in activity associated with the structural adjustment underway in Canada’s economy. The Bank’s Governing Council judges that the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 1/2 per cent.

Information note

The next scheduled date for announcing the overnight rate target is 13 April 2016. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR at that time.

Source: Bank of Canada.ca

Interest Rates To Stay Low For 18 Months Say Economists

A poll of 40 economists by Reuters revealed that the financial experts are not forecasting any rise in interest rates until 2017.

The economists believe that, although there is a chance of a further reduction in rates by the Bank of Canada, it is also unlikely if the economy is picking up from the technical recession.

The growth in the second half of 2015 is by no means agreed on by those polled, however. There are, of course, many unknowns, not least of all oil prices, which may mean a change to BoC policy along the way.

Source: Steve Randal @ Canadian Real Estate Magazine

Labour Market Boosts Canadian Real Estate in the Second Quarter

Royal LePage reports that 2015 is shaping up to be a record year; urges Bank of Canada move cautiously on further interest rate cuts

Against the backdrop of mixed economic signals at home and abroad, Canada’s real estate market remained healthy in the second quarter of 2015, with solid national average price appreciation across housing segments. Furthermore, the combination of high sales volumes and vigorous price appreciation in Canada’s largest cities has put the national residential real estate market on track for a record year in terms of total sales. With most Canadian real estate markets across the country advancing modestly, and some rapidly, Royal LePage advises that a further interest rate cut by the Bank of Canada could over-stimulate markets such as greater Toronto and Vancouver.

According to the Royal LePage House Price Survey and Market Survey Forecast released today, the average price of a home in Canada rose between 3.9 per cent and 7.5 per cent year-over-year in the second quarter. The detached bungalow segment had the highest national increase, rising 7.5 per cent year-over-year to $436,938, while standard two-storey homes appreciated 6.8 per cent to $471,002. During the same period, the average price of a condominium rose 3.9 per cent to $268,583. Looking ahead, Royal LePage forecasts that the average price of a home in Canada will increase 6.1 per cent for the full year when compared to 2014.

“The robust national average home price increases that we have seen in the second quarter are heavily influenced by activity levels in Toronto and Vancouver,” said Phil Soper, president and chief executive officer, Royal LePage. “The housing industry in both cities boasts a foundation of prosperous labour markets driving demand for housing that is in limited supply – above average price increases aren’t going away any time soon. Looking to Canada as a whole, 2015 is shaping up to be a record year for housing, despite the cloud of economic uncertainty caused by low oil prices and twitchy global economies.”

Some of the highest average price increases in the country were seen in Toronto and Hamilton, particularly in the detached home segments. In the second quarter of 2015, Toronto saw a 12.9 per cent year-over-year average price increase in detached bungalows and an 11.6 per cent increase in the price of standard two-storey homes. During the same period Hamilton saw 10.9 per cent and 13.0 per cent increases in the same two categories, respectively. Running parallel to this, Toronto gained approximately 69,000 jobs between June 2014 and June 2015 and saw a decrease of 1 full percentage point in the unemployment rate to 6.9 per cent, according to Statistics Canada[1]. Hamilton’s unemployment rate also declined, sitting at 5.2 per cent in June, down from 6.5 per cent in the same month last year, as the city gained approximately 5,600 new jobs. (All labour force figures refer to three month moving averages, adjusted for seasonality).

“Sales in residential real estate are firmly tied to consumer confidence,” said Soper. “This confidence is driven in large part by employment status and prospects. You can see this clearly in the Toronto-Hamilton region where positive full-time jobs trends, supported by the low interest rate environment, are encouraging home purchases in record numbers. We believe an additional interest rate cut, which has been discussed with increasing frequency in recent weeks, would be inappropriate policy at this time.”

“While the oil shock has been a troublesome drag on our economy this year, it seems premature to ring the recession alarm bells now, injecting further monetary stimulus,” continued Soper. “The country’s all-important real estate market simply does not need a rate cut. I worry that stoking this engine further could move us from a perfectly manageable major market expansion into a more difficult correction, as price levels decouple from more household incomes.”

In Western Canada, Vancouver saw significant year-over-year home price appreciation in the second quarter, posting 12.6 and 13.6 per cent price increases in the detached bungalow and standard two-storey home categories, respectively. In June, the city’s unemployment rate was 6.1, up 0.4 percentage points from its level a year earlier, but still lower than the national average and well within normal levels for the region. Meanwhile in the Calgary market, job losses have been lower than many expected in the wake of oil price declines. Although the June unemployment rate has edged up 0.7 percentage points over the past year to a still low 5.9 per cent, the city actually added 30,000 jobs during the period. Average home prices in the region remained relatively flat year-over-year in most segments, with the average price of a detached bungalow slipping 0.9 per cent, while the average price of a standard two-storey home decreased by 3.1 percent. The average price of a condominium rose 1.6 per cent.

“We believe the oil-shock adjustment to home values in Calgary has for the most part already taken place and expect stable to modestly declining prices through the second half,” said Soper. “Vacancy rates remain low in Calgary as individuals and families continue to be attracted to the vibrant city and those that have spent their careers in the energy sector shrug off declines as temporary and simply a characteristic of the industry’s cyclical nature.”

Threats to the health of Canada’s real estate market in the remaining months of the year include the continued drag from oil price declines and the risk of sharper regional home price corrections if oil fell further; further delay in anticipated export benefits from the lower Canadian dollar; a return to calamity in Europe if the tentative sovereign debt deal with Greece comes apart; and the potential for a brewing capital markets crisis in China.

“A recession now, if we have technically reached that point, appears to be more of a stiff breeze to the hurricane we battled at the end of the last decade. Further, it would seem prudent for Governor Poloz to hold some dry powder in reserve, should one of the seemingly endless geopolitical crisis situations broadside us,” concluded Soper.

Regional Market Summaries

Due to tight inventory in Halifax the average price of a standard condominium jumped by 4.6 per cent year-over-year to $256,333. Average prices of detached bungalows increased by 2.1 per cent to $298,167 and standard two-storey homes rose 1.8 per cent to $368,850. Royal LePage forecasts that average Halifax house prices for the full year will remain essentially flat, rising by 0.1 per cent by the end of 2015.

High inventory levels have led to slight price softness in some housing types in St. John’s in the second quarter. The average price of standard two-storey homes saw a small decrease, taking a 0.5 per cent dip year-over-year to $401,833, while detached bungalows decreased 0.9 per cent to $295,333. Meanwhile, the average price of a standard condominium rose marginally by 1.7 per cent to $316,067 in the same period.

In Montreal, the average price of a standard condominium rose 2.1 per cent year-over-year to $244,556. During the same period detached bungalows saw a 0.2 per cent decline to $295,786 while standard two-storey homes decreased 1.5 per cent to $398,214. By the end of the year, Royal LePage forecasts average Montreal house prices will increase 0.6 per cent for the full year, over 2014.

Average house prices in Ottawa saw modest growth in the second quarter. Standard two-storey homes increased 2.3 per cent year-over-year to $411,350, while detached bungalows increased 1.9 per cent to $409,167. The average price of a standard condominium in the city remained flat at $257,467. By year’s end, Royal LePage forecasts that the average price for a home in the nation’s capital will increase 2.7 per cent over 2014.

Ongoing inventory shortages led to significant increases in Toronto home prices in the second quarter. The average price of a detached bungalow increased 12.9 per cent year-over-year to $712,622 while the average price of a standard two-storey rose 11.6 per cent to $834,728. Over the same period, the average price of a standard condominium rose 5.0 per cent to $402,901. Royal LePage forecasts that prices will see a sizeable 9.6 per cent increase in the Toronto market by year’s end, over 2014.

In Winnipeg, detached bungalows and standard two-storey homes saw modest year-over-year increases during the second quarter, with average prices rising 1.8 per cent to $316,732 and 1.4 per cent to $340,866, respectively. The average price of a standard condominium experienced a slight decline, falling 1.5 per cent to $205,969. Royal LePage forecasts that the average home price in Winnipeg for the full year will increase 1.3 per cent over 2014.

Oversupply has led to a decline in home prices in Regina in the second quarter. The average price of a detached bungalow dropped 1.5 per cent year-over-year to $328,500, while the average price of a standard two-storey home remained flat at $372,500. During the same period, the average price of a standard condominium in the city fell by 1.4 per cent to $214,500. By yearend, Royal LePage forecasts a 0.6 per cent decrease in the average home price in Regina compared to last year.

A relatively stable market has continued in Calgary in spite of the weak price of oil and speculation of further economic challenges. The standard condominium category gained 1.6 per cent year-over-year to an average price of $291,022. Over the same time span, standard two-storey homes declined 3.1 per cent to $474,239 and detached bungalows inched down 0.9 per cent to $496,689. Royal LePage forecasts that average prices for homes in Calgary will decrease 2.4 per cent for the full year in 2015.

The market has remained resilient in Edmonton despite struggles in the oil sector. Detached bungalows rose 4.1 per cent year-over-year to an average price of $364,942 and standard two-storey homes increased 3.3 per cent to $384,250. Standard condominiums also saw their average price appreciate, rising 4.4 per cent to $246,812. Looking ahead, Royal LePage forecasts an average price increase of approximately 2.0 per cent in the Edmonton housing market for 2015.

High demand resulted in significant increases in average home prices in Vancouver in the second quarter of the year. Standard two-storey homes and detached bungalows both saw double-digit increases, rising 13.6 per cent year-over-year to $1,368,125 and 12.6 per cent to $1,247,125, respectively. Standard condominiums experienced a healthy increase, rising 6.0 per cent to an average price of $521,425. Royal LePage forecasts that average home prices in Vancouver will rise by 9.4 per cent by year-end.

Source: Royal LePage News

Rate Cut Could Add Fire To Toronto, Vancouver House Markets

Even fears of recession aren’t slowing down buyers.

A further interest rate cut by the Bank of Canada could further fuel flames in the country’s two biggest real estate markets which are once again showing signs of overheating, housing watchers say.

“It’s another log on the fire for the Toronto and Vancouver housing markets,” says economist Sal Guatieri, vice president of BMO Economic Research, who expects to see a cut next week in an attempt to kickstart lagging growth.

“It’s not the amount that matters — the reduction in borrowing costs will be quite minimal — it’s the message it sends to homeowners and potential buyers that rates are going lower rather than higher and will almost certainly stay low for quite some time. That just encourages more people into the market.”

Both of Canada’s priciest cities are already swamped with far more buyers than properties for sale.

Sales — and prices — have hit new records in both Toronto and Vancouver this year. The frenzy has been driven by low interest rates, an ongoing shortage of listings and a growing sense of panic, especially among first-time buyers, that if they don’t get in now, they will be locked out of the market forever, particularly the low-rise house market.

“We are becoming concerned again about the possibility of a housing bubble in Toronto and Vancouver because prices are rising so much faster than incomes and because interest rates are continuing to fall rather than go up,” says Guatieri.

“We were much more comfortable a year or two ago when both markets seemed to have cooled off a bit and prices were rising more moderately.”

Both Toronto and Vancouver set new sales records for the month of June.

Almost 12,000 houses and condos changed hands last month across the GTA, up 18.4 per cent from a year earlier. The average sale price of a detached house was $816,583 – and over $1 million in the City of Toronto – up 14.3 per cent year over year.

Greater Vancouver’s 4,375 sales were up 28.4 per cent for the same period. The average detached house was $1.45 million – and a staggering $2.39 million for a stand-alone house in the core City of Vancouver – up 20.2 per cent from June of last year.

Condo sales skyrocketed in both regions, up 22.4 across the GTA and 35.6 per cent across Greater Vancouver, year over year.

All that demand helped push up condo prices 6.3 per cent in the GTA, to an average of $390,894, and up 5.6 per cent in Greater Vancouver to $479,450.

Last January’s surprise Bank of Canada rate cut to .75 per cent has been a contributing factor to those escalating sales and prices, says Penelope Graham, editor and spokesperson with mortgage comparison site RateSupermarket.ca.

A cut to .5 per cent, as is expected, would see the five-year fixed rate dip below the current low of 2.39 per cent and further boost the illusion of affordability, she said.

“There are more people now entering the market with just five per cent down, because that’s all they can afford. There is a real sense of urgency in the bigger markets to get in now, before it’s too late, and get in with what you have,” says Graham.

“That’s potentially putting people in a really vulnerable position in terms of their debt levels.”

Toronto realtor David Fleming says he’s seeing a surge in demand even for condos — especially under $400,000 — and younger buyers than ever, backed by low interest rates and help from their real-estate rich baby boomer parents who want only the best for their children.

“I’ve seen a serious culture change. Young buyers used to be 26 or 27 years old. They’d graduated university, worked for a few years and lived at home then rented and bought. Now buyers are cutting out those middle steps.”

He’s seeing first-time buyers as young as 22 determined to own rather than rent. And he’s hearing from people who stepped to the sidelines three or four years ago, thinking the much-talked-about bubble was about to burst.

Instead, they’ve watched prices climb further out of reach: Back in June of 2012, the average sale price of houses and condos combined across the GTA was $508,622. This June, the average sale price was $639,184.

Where the average sale price of a condo in the sought-after City of Toronto was $364,597 in June of 2012, last month’s average was $418,599.

That was up seven per cent just over June of last year as bidding wars and bully bids — long the hallmark of the highly competitive low-rise house market — have pushed up prices for well-located, unique or larger condos seen as sound investments and house alternatives for the longer term.

“That’s a testament to the froth in the house market,” says BMO economist Guatieri.

“So many people are now priced out, they have no other alternative than to get into the condo market, and that’s pushing up prices, even though there is ample supply.”

Apart from the oil-impacted markets of Alberta, Saskatchewan, Newfoundland and Labrador, Canadian house prices are holding up well and consumer confidence appears to be strong, even in the midst of growing talk about a possible recession.

“None of my clients are talking about the Big R word,” says Toronto-based mortgage broker Jake Abramowicz.

“They’re confident that rates will stay low for a very long time now and that the market — both condos and houses — will not correct anytime soon.”

Source: Susan Pigg @ The Toronto Star

No Risk of ‘Bubble,’ Poloz says of Canada’s Bloated Housing Market

The Bank of Canada’s top brass assured a parliamentary committee that Canada’s bloated housing market has not become a risky asset bubble, despite the central bank’s own calculation that house prices nationwide are roughly 20 per cent overvalued.

“We don’t believe we’re in a bubble,” Bank of Canada Governor Stephen Poloz said in testimony Tuesday to the House of Commons Standing Committee on Finance. He said Canada’s long-running boom in the housing market hasn’t been underpinned by the kind of rampant speculative buying that is the hallmark of an asset bubble.

“Our housing construction has stayed very much in line with our estimates of demographic demand,” he said. “There’s no excess.”

This despite the central bank’s own estimate, published last December in its Financial System Review, that Canada’s housing market is overpriced by between 10 and 30 per cent.

Mr. Poloz indicated that he believes the overvaluation is not a symptom of runaway prices and widespread investor speculation, but rather of ongoing strength in consumer demand spurred by historically low interest rates – rates that were cut by the central bank in order to keep consumer demand buoyant to support Canada’s economy during the Great Recession.

“This is one of the by-products of what we’ve been through. It’s not something that happened simply by itself,” he said. “It would be very unusual to have that and not have a degree of overvaluation.”

Mr. Poloz added that the overvaluation doesn’t necessarily mean the market is in need of a 10-to-30-per-cent downturn to bring it back into balance. He said that rising incomes as the economy gains momentum could help close the affordability gap, without a sharp drop in home values.

“We believe that as the fundamentals catch up with it, it will be sustained,” he said.

Senior Deputy Governor Carolyn Wilkins added that the central bank still believes Canada’s overall housing market is “headed for a soft landing,” despite the sudden oil-shock upheaval that threatens considerable instability in Alberta’s until-recently booming housing sector.

“We’re not expecting whatever transpires in Alberta to create spillovers that, from a financial stability standpoint, would be worrisome for the rest of Canada.”

Mr. Poloz also defended the Bank of Canada’s surprise cut of its key interest rate in January, which critics fear may exacerbate Canadian households’ already hyper-extended mortgage and debt loads.

“On the surface, lower interest rates would be expected to promote more borrowing, which would increase this vulnerability,” he said in his opening statement to the committee. “However, in the near term, lower borrowing rates will actually mitigate this risk, by reducing payments for mortgage holders and giving us more economic growth and employment gains.”

“We believe that the best contribution the Bank can make to lowering financial stability risks through time is to help the economy return to full capacity and stable inflation sooner, rather than later.”

Mr. Poloz added that he believes the January rate cut, which reduced the bank’s key rate to 0.75 per cent from 1.00 per cent, is doing its job in helping the Canadian economy weather the effects of the oil shock – although he admitted that the evidence of the cut’s impact “is thin at this stage.”

“The evidence we have at present would be primarily in the export sector,” he said, where the resulting decline in the Canadian dollar has been boosting exporters’ Canadian-dollar cash flow and improving their price competitiveness in export markets.

“We also know that consumers with flexible rate mortgages are already getting lower payments,” he added.

Mr. Poloz reiterated that the non-energy segments of the Canadian economy are starting to assert themselves more strongly in the current quarter, as the impact of the oil shock that were felt in the first quarter and the 2014 fourth quarter begin to fade, and the pick-up in non-energy export demand gains momentum.

“Outside of the energy sector, other areas of the economy appear to be doing well,” he said in his statement. “The segments of non-energy exports that we expected to lead the recovery are doing so, and we expect this trend to be buttressed by stronger U.S. growth and the lower Canadian dollar.”

Specifically, Mr. Poloz noted that key Canadian export sectors tied to U.S. business investment – including machinery and equipment, building materials, metals and aerospace – are showing “very positive growth.” He noted that these leading sectors represent more than half of Canada’s non-energy exports.

He repeated the bank’s belief that the Canadian economy will bounce back from its estimated flat first-quarter growth starting in the second quarter, with momentum picking up even more in the second half of the year.

“We’re not suggesting that the oil shock was just a three or four month event and then it’s over,” he said. “What we’re suggesting is that there are other sectors of the economy that are very strong.”

Mr. Poloz also defended his controversial use of the word “atrocious” to describe Canada’s first-quarter economy in an interview with the Financial Times last month – a term many critics felt fuelled concern and confusion over Canada’s economic state. The Bank of Canada subsequently estimated that the economy had zero growth in the quarter.

“What I was trying to describe was that over the case of these first few months, the day-to-day data flow could look quite negative. And we wanted markets to understand that we already believed that the data could be quite poor,” he said.

“It’s certainly not our intent to surprise or to frighten people.”

Source: David Parkinson @ The Globe & Mail

Bank of Canada Announces Overnight Rate

Despite a “stalled” economy in the first quarter of 2015, the Bank of Canada revealed some optimism as it held steady the target for the overnight rate.

“Risks to the outlook for inflation are now roughly balanced and risks to financial stability appear to be evolving as expected,” the Bank of Canada wrote in an official release. “The Bank judges that the current degree of monetary policy stimulus remains appropriate and therefore is maintaining the target for the overnight rate at 0.75 per cent.”

The total CPI inflation is at one per cent, due to a drop in consumer energy prices, and core inflation has hovered around 2 per cent over the past few months, according to the BoC.

“The Canadian economy is estimated to have stalled in the first quarter of 2015,” the Central bank wrote. “The Bank’s assessment is that the impact of the oil price shock on growth will be more front-loaded than predicted in January, but not larger.”

The BoC also stated it will continue to monitor the impact oil price shock will have on the economy. However, it is expecting the economy to rebound in the coming months.

“As the impact of the oil shock on growth starts to dissipate, this natural sequence is expected to re-emerge as the dominant trend around mid-year,” the BoC wrote. “Real GDP growth is projected to rebound in the second quarter and subsequently strengthen to average about 2 1/2 per cent on a quarterly basis until the middle of 2016. The Bank expects real GDP growth of 1.9 per cent in 2015, 2.5 per cent in 2016, and 2.0 per cent in 2017.”

It’s a different tune than the one sung in January, when the Bank of Canada shocked the country by cutting its long-held rate by one-quarter of a per cent.

Source: Justin da Rosa @ Canadian Real Estate Wealth

Bank of Canada Lowers Overnight Rate Target To 3/4 Per Cent

Ottawa – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada.

Inflation has remained close to the 2 per cent target in recent quarters. Core inflation has been temporarily boosted by sector-specific factors and the pass-through effects of the lower Canadian dollar, which are offsetting disinflationary pressures from slack in the economy and competition in the retail sector. Total CPI inflation is starting to reflect the fall in oil prices.

Oil’s sharp decline in the past six months is expected to boost global economic growth, especially in the United States, while widening the divergences among economies. Persistent headwinds from deleveraging and lingering uncertainty will influence the extent to which some oil-importing countries benefit from lower prices. The Bank’s base-case projection assumes oil prices around US$60 per barrel. Prices are currently lower but our belief is that prices over the medium term are likely to be higher.

The oil price shock is occurring against a backdrop of solid and more broadly-based growth in Canada in recent quarters. Outside the energy sector, we are beginning to see the anticipated sequence of increased foreign demand, stronger exports, improved business confidence and investment, and employment growth. However, there is considerable uncertainty about the speed with which this sequence will evolve and how it will be affected by the drop in oil prices. Business investment in the energy-producing sector will decline. Canada’s weaker terms of trade will have an adverse impact on incomes and wealth, reducing domestic demand growth.

Although there is considerable uncertainty around the outlook, the Bank is projecting real GDP growth will slow to about 1 1/2 per cent and the output gap to widen in the first half of 2015. The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar, and the Bank’s monetary policy response. The Bank expects Canada’s economy to gradually strengthen in the second half of this year, with real GDP growth averaging 2.1 per cent in 2015 and 2.4 per cent in 2016. The economy is expected to return to full capacity around the end of 2016, a little later than was expected in October.

Weaker oil prices will pull down the inflation profile. Total CPI inflation is projected to be temporarily below the inflation-control range during 2015, moving back up to target the following year. Underlying inflation will ease in the near term but then return gradually to 2 per cent over the projection horizon.

The oil price shock increases both downside risks to the inflation profile and financial stability risks. The Bank’s policy action is intended to provide insurance against these risks, support the sectoral adjustment needed to strengthen investment and growth, and bring the Canadian economy back to full capacity and inflation to target within the projection horizon.

Source: Bank of Canada

Some Market Players Suddenly Think Bank of Canada Could Cut Rates

Rates, loonie in focus

Some market players are now betting that the Bank of Canada could cut interest rates, rather than hike.

The speculation is mild at this point, but it’s the shift in sentiment that’s important, said chief currency strategist Camilla Sutton of Bank of Nova Scotia.

This shift began Friday as Statistics Canada released what was seen as a weak labour market report, showing a loss of 4,300 jobs in December and the unemployment rate holding at 6.6 per cent.

As The Globe and Mail’s David Parkinson reported, December marked two consecutive months of jobs losses, though the numbers were actually better than they looked because of the strength in full-time employment.

Still, some in the markets suddenly changed their view, speculating that the Bank of Canada could cut its benchmark rate from 1 per cent at some point in the next year, Ms. Sutton said.

Before that, the speculation had been on when the central bank under Governor Stephen Poloz could raise rates for the first time.

That’s not to say that Ms. Sutton sees a rate cut in the cards, only that some others do.

“Markets are pricing in a 4-per-cent probability of an interest rate cut in Canada over the next 12 months,” she said.

“The shift has been relatively dramatic with the market having been pricing in an 8-per-cent probability of a hike just two sessions ago,” she added.

“Weaker-than-expected employment combined with falling oil prices is taking its toll on BoC expectations and CAD; however, we would suggest that the deterioration needed for the BoC to turn towards interest rate cuts would be significant, and is not part of our forecasts.”

She was referring to the loonie by its symbol.

No matter how it plays out, rates aren’t going to rise any time soon.

Charles St-Arnaud of Nomura Securities, for example, said yesterday that he expects the Bank of Canada to cut its outlook for economic growth when it releases its monetary policy report next week, by 0.3 of a percentage point, in turn bringing new thinking to the rate outlook in the markets.

“If we are correct, this means that growth in 2015 would be only slightly higher than potential,” he said.

“With the output gap closing at a slower pace, we doubt the BoC will be in a position to hike rates until 2016.”

The plunge in oil prices has prompted some observers to push back their expectations for a rate hike until sometime next year, thus lagging the Federal Reserve.

Indeed, Mr. Poloz said recently that the collapse in oil prices could shave 0.3 of a point from economic growth this year.

But, as senior economist Sal Guatieri of BMO Nesbitt Burns noted, that was a month ago.

“Since then, prices have slid a further $17, which could have at least another tenth off growth,” Mr. Guatieri said today.

“A further downgrade of the bank’s growth outlook could push a rate hike into 2016,” he added.

“We are currently calling for an October 2015 move (four months after Fed liftoff, but this could change if Lane sounds particularly gloomy today.”

All of this has played into the weakness of the Canadian dollar, which has tumbled along with crude prices, and hit new depths again today.

The loonie, as the country’s dollar coin is known, touched a low of 83.38 cents U.S., and a high of 83.82, settling into its new territory below the 84-cent mark.

And it could dip further today, Ms. Sutton said, as markets await a speech by Timothy Lane, the Bank of Canada’s deputy governor, on oil and its impact on the economy.

The Canadian dollar lost 9 per cent, and just about everyone sees it losing more ground this year.

Nomura Securities has one of the harsher forecasts, projecting the loonie will dip below 79 cents by the third quarter.

Source: Globe & Mail

OECD Sees BoC Starting To Hike Rates In May, ‘Steadily Thereafter’

The Organization for Economic Co-operation and Development believes the Bank of Canada will start raising its key interest rate next spring – about six months ahead of what most economists believe and what the central bank has been implying.

In the OECD’s twice-annual Economic Outlook, released early Tuesday, the international economic policy and research body argued that Canada’s low and economically stimulative 1.0-per-cent central bank rate “will need to be gradually withdrawn to counter inflationary pressures,” as its economy grows toward reaching its full output capacity.

“It is assumed in this projection that the first policy rate increase occurs in late May of 2015, and that rates rise steadily thereafter,” the outlook report said.

Most economists don’t expect the first Canadian rate increase until the fourth quarter of 2015, based on the signals central bank officials have been giving in recent months. The bank has said it believes Canada’s output gap won’t close until the second half of 2016, around the same time that inflation has settled around the bank’s target rate of 2 per cent “on a sustainable basis.” And while the central bank has said that it takes six to eight quarters for a change in interest rates to exert its full effect on inflation, senior bank officials have also been clear in recent months that they are leaning toward keeping rates lower for longer in the current cycle, given the numerous risk factors hanging over the uncertain the global economy.

But the OECD argued in its report that while “uncertainty” over the amount of slack in Canada’s economy justifies the Bank of Canada standing pat on rates for the time being, “it will have to start to withdraw stimulus as remaining slack is progressively taken up.”

The OECD projects that Canada’s economy will grow by 2.6 per cent next year and 2.4 per cent in 2016, slightly above the Bank of Canada’s base-case forecasts of 2.4 per cent in 2015 and 2.2 per cent in 2016.

This isn’t the first time OECD economists have been at odds with the Bank of Canada’s interest rate trajectory. A year ago, when the OECD released its fall 2013 Economic Outlook, it called for the central bank to both begin rate hikes earlier and increase rates more steeply than the bank had been signalling. Then, as now, the OECD was concerned about a build-up of inflationary pressures as the Canadian economy picked up momentum.

At the time, the OECD’s concern looked misplaced, given that inflation was below 1 per cent. And, indeed, its call for rate increase to begin before the end of 2014 was, in retrospect, premature.

But 12 months later, Canada’s inflation picture may make the OECD’s argument more compelling. Last week, Statistics Canada reported that the country’s total Consumer Price Index inflation rate in October was 2.4 per cent, its highest since early 2012. The so-called “core” inflation rate, which excludes the most volatile components of CPI and is the Bank of Canada’s key guide to underlying inflation trends, was 2.3 per cent last month, its highest since the end of 2008.

The OECD said Canada’s improving growth next year will be driven by rising export demand, particularly from the United States, which accounts for three-quarters of Canada’s exports. The OECD expects the U.S. economy will grow 3.1 per cent next year, its strongest in a decade and the highest among major advanced countries.

But in a conference call with reporters, OECD chief economist Catherine Mann cautioned against countries counting too much on resurgent U.S. demand to be the catalyst for their export-led recoveries. She noted that U.S. consumption and imports has lagged its typical pace in a recovery, implying that consumers have slowed their spending in the current cycle.

Ms. Mann suggested that rising income inequality may be behind the lack of consumer demand growth in the United States, as median incomes have shown little growth in the post-recession period. Corporate investment has also been stubbornly slow to recover, another drag on imports.

“That says something about the prospects for growth” in the rest of the world, she said. If other countries are waiting for U.S. import demand to lift their economies, she said, “we’re not there for them.”

Source: David Parkinson – The Globe & Mail

Bank of Canada Cuts Economic Outlook

The Bank of Canada continued to hold the line on interest rates despite the recent acceleration in inflation, but adjusted its inflation outlook Wednesday to acknowledge the faster-than-expected rise in Canadian consumer prices.

The central bank also said it expects Canada’s economy to return to full capacity a bit later than previously projected.

The Canadian dollar dipped immediately after Governor Stephen Poloz and his colleagues released their statement.

In its regularly scheduled interest-rate policy statement, the central bank, as expected, left its key policy interest rate unchanged at 1 per cent, where it has held steady for nearly four years.

But in its quarterly Monetary Policy Report, released at the same time, the bank raised its consumer price index inflation projection to 2.1 per cent for the just-ended second quarter and 2 per cent for the third quarter, from an earlier forecast of 1.6 per cent and 1.8 per.

It also raised estimates for its so-called “core” inflation measure – which excludes some of the most volatile components of the CPI, and is considered a better gauge of underlying inflation pressures in the broad economy – to 1.6 per cent in the second quarter and 1.7 per cent in the third quarter, from 1.2 per cent and 1.4 per cent, respectively, in the April report.

Nevertheless, slightly slower-than-expected economic growth has prompted the central bank to move back its expectation for when that core measure will reach 2 per cent – the inflation target the bank relies on as its guide for setting interest rates. It now projects the core measure will stabilize at 2 per cent third quarter of 2016, rather than its previous call of the 2016 first quarter.

David Parkinson @ The Globe & Mail

Bank Of Canada Adds Ukraine To List Of Concerns

[heading subtitle=”Will, in all likelihood, keep its trend-setting rate at a low one per cent, where it has been since late 2010 amid weak global economic conditions.”]The Bank of Canada[/heading]

OTTAWA — Bank of Canada is keeping its low-interest rate policy in place for a while longer, signalling Wednesday that it remains to be convinced the global economy is out of danger — adding Ukraine to its list of worries.

“Volatility in global financial markets has increased somewhat, reflecting buoyant market conditions in most advanced economies and increased risk differentiation among emerging markets,” it said. “More recently, tensions in Ukraine have added to geopolitical uncertainty.”
The central bank kept its overnight policy rate at one per cent in its scheduled announcement date, a setting that has been in place since September 2010.

The low rate has brought Canadian consumers and businesses some of the most attractive borrowing conditions in memory and helped provide economic stimulus following the 2008-9 recession.

The bank’s decision to stay the course was widely expected by markets, which believe the central bank won’t be anxious to raise interest rates, or even signal its intention to do so, for some time.

Economists say part of bank governor Stephen Poloz’s calculation is that maintaining a dovish stance on rates is at least partly responsible for the Canadian dollar’s well below parity with the American dollar in the past few months, which helps him advance his agenda of stimulating export growth and moderately pumping up inflation.

In a statement, the bank’s governing council acknowledged that conditions had improved somewhat from its last release in January.

“On the whole, the fundamental drivers of growth and inflation in Canada continue to strength gradually, as anticipated,” it said.

The fourth quarter growth rate had come in at 2.9 per cent, almost half-a-point better than the bank’s own guess, and at 1.5 per cent, January inflation edged closer to the bank’s target of two per cent.

Poloz had publicly signalled concern when overall inflation fell below one per cent and core inflation remained close to the low end of the Bank of Canada’s range of between 1.0 and 3.0 per cent.

On the housing front, the bank likes what it sees. It said recent data supports its view of a soft-landing scenario, somewhat contradicting a report from a U.S. financial institution this week that predicted prices could fall by 20 per cent. And it believes household debt levels are also stabilizing.

But the bank is not entirely convinced the good news represents a permanent turning point in the outlook. It called low inflation an important downside risk, judging it would remain well below the target for some time. As well, while fourth quarter growth was higher than expected, the first quarter of 2014 will likely be weaker, it said.

Overall, the bank hasn’t changed its mind that 2014 will see a modest 2.5 per cent advance.

Meanwhile, while exports have been stronger, they remain an underperformer in the economy and business investment has yet to pick up, it said.

On top of that, the world remains beset with risks and uncertainty, it cautioned.

Putting it all together, the bank said “the balance of risks remains within the zone for which the current stance of monetary policy is appropriate.”

The next interest rate announcement is scheduled for April 16.

Source: Julian Beltrame, The Canadian Press @ CTV New.ca

Think-Tank To New BoC Governor: Start Raising Interest Rates

Julian Beltrame, The Canadian Press
Published Wednesday, May 15, 2013 11:23AM EDT

OTTAWA — Slashing interest rates and printing wads of money may have saved the global economy from catastrophe, but taking back all the monetary candy opens the world to new risks, the Bank of Canada warns in a research paper. Read more

Bank of Canada Maintains Overnight Rate Target At 1%

Ottawa, Ontario – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economy has unfolded broadly as the Bank projected in its July Monetary Policy Report (MPR). The economic expansion in the United States is progressing at a gradual pace. Europe is in recession and recent indicators point to a continued contraction. In China and other major emerging economies, growth has slowed somewhat more than expected, though there are signs of stabilization around current growth rates. Notwithstanding the slowdown in global economic activity, prices for oil and other commodities produced in Canada have, on average, increased in recent months.  Global financial conditions have improved, supported by aggressive policy actions of major central banks, but sentiment remains fragile.

In Canada, while global headwinds continue to restrain economic activity, domestic factors are supporting a moderate expansion. Following the recent period of below-potential growth, the economy is expected to pick up and return to full capacity by the end of 2013. The Bank continues to project that the expansion will be driven mainly by growth in consumption and business investment, reflecting very stimulative domestic financial conditions. Housing activity is expected to decline from historically high levels, while the household debt burden is expected to rise further before stabilizing by the end of the projection horizon. Canadian exports are projected to pick up gradually but remain below their pre-recession peak until the first half of 2014, reflecting weak foreign demand and ongoing competitiveness challenges.  These challenges include the persistent strength of the Canadian dollar, which is being influenced by safe haven flows and spillovers from global monetary policy.

After taking into account revisions to the National Accounts, the Bank projects that the economy will grow by 2.2 per cent in 2012, 2.3 per cent in 2013 and 2.4 per cent in 2014.

Core inflation has been lower than expected in recent months, reflecting somewhat softer prices across a wide range of goods and services.  Core inflation is expected to increase gradually over coming quarters, reaching 2 per cent by the middle of 2013 as the economy gradually absorbs the current small degree of slack, the growth of labour compensation remains moderate and inflation expectations stay well-anchored. Total CPI inflation has fallen noticeably below the 2 per cent target, as expected, and is projected to return to target by the end of 2013, somewhat later than previously anticipated.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 per cent inflation target.  The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.

Source: Bank of Canada

 The next scheduled date for announcing the overnight rate target is 4 December 2012.