Bank of Canada maintains overnight rate target at 1 per cent

Ottawa - 25 October 2011

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 slowed markedly as several downside risks to the projection outlined in the Bank’s July Monetary Policy Report (MPR) have been realized. Financial market volatility has increased and there has been a generalized retrenchment from risk-taking across global markets. The combination of ongoing deleveraging by banks and households, increased fiscal austerity and declining business and consumer confidence is expected to restrain growth across the advanced economies. The Bank now expects that the euro area—where these dynamics are most acute—will experience a brief recession. The Bank’s base-case scenario assumes that the euro-area crisis will be contained, although this assumption is clearly subject to downside risks. In the United States, diminished household confidence, tighter financial conditions and increased fiscal drag are expected to result in weak real GDP growth through the first half of 2012, before growth strengthens gradually thereafter. In Japan, reconstruction activity is projected to boost growth over 2012-13, although Japan’s economy will be constrained by reduced global activity and the sharp appreciation of the yen. Growth in China and other emerging-market economies is projected to moderate to a more sustainable pace in response to weaker external demand and the lagged effects of past policy tightening. These developments, combined with recent declines in commodity prices, are expected to dampen global inflationary pressures.

The outlook for the Canadian economy has weakened since July, with the significantly less favourable external environment affecting Canada through financial, confidence and trade channels. Although Canadian growth rebounded in the third quarter with the unwinding of temporary factors, underlying economic momentum has slowed and is expected to remain modest through the middle of next year. Domestic demand is expected to remain the principal driver of growth over the projection horizon, though at a more subdued pace than previously anticipated. Household expenditures are now projected to grow relatively modestly as lower commodity prices and heightened volatility in financial markets weigh on the incomes, wealth and confidence of Canadian households. Business fixed investment is still expected to grow solidly in response to very stimulative financial conditions and heightened competitive pressures, although it will be dampened by the weaker and more uncertain global economic environment. Net exports are expected to remain a source of weakness, owing to sluggish foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

Overall, the Bank expects that growth in Canada will be slow through mid-2012 before picking up as the global economic environment improves, uncertainty dissipates and confidence increases. The Bank projects that the economy will expand by 2.1 per cent in 2011, 1.9 per cent in 2012, and 2.9 per cent in 2013.

The weaker economic outlook implies greater and more persistent economic slack than previously anticipated, with the Canadian economy now expected to return to full capacity by the end of 2013. As a result, core inflation is expected to be slightly softer than previously expected, declining through 2012 before returning to 2 percent by the end of 2013. The projection for total CPI inflation has also been revised down, reflecting the recent reversal of earlier sharp increases in world energy prices as well as modestly weaker core inflation. Total CPI inflation is expected to trough around 1 per cent by the middle of 2012 before rising with core inflation to the two per cent target by the end of 2013, as excess supply in the economy is slowly absorbed.

Several significant upside and downside risks are present in the inflation outlook for Canada. Overall, the Bank judges that these risks are roughly balanced over the projection horizon.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.

 

 

 

 

 

January 17, 2011



OTTAWA - Finance Minister Jim Flaherty has announced new mortgage regulations aimed at reducing Canadians' soaring household debt.

Flaherty has unveiled three new rules:

— Mortgage amortization periods will be reduced to 30 years from 35 years.

— The maximum amount Canadians can borrow to refinance their mortgages will be lowered to 85 per cent from 90 per cent.

— The government will withdraw its insurance backing on lines of credit secured on homes, such as home equity lines of credit.

The rules are aimed at encouraging responsible lending and borrowing and encouraging people to increase their home equity.

"Our measures will help improve the financial situation of households in Canada," Flaherty said.

"While interest rates are currently low by historical standards, eventually they will rise. Canadians should — and for the most part do — understand this when taking on significant debt such as the purchase of a new home."

The minister said the measures are aimed at protecting "the stability of the economy by ensuring lenders' practices are sustainable." He said that will increase the security and stability of home ownership.

"This will also increase the savings of Canadian families — savings of tens of thousands of dollars over the life of a mortgage, savings that go back in the pockets of hardworking families, where they belong."

The new rules come on the heels of a Bank of Canada announcement that Canadians' domestic debt burdens have hit record levels.

The ratio of household debt to disposable income has reached 147 per cent and household debt has reached $1.4 trillion.

The International Monetary Fund has called household debt the No. 1 risk to the Canadian economy.

 

 

September 08, 2010

 

 

 

 

 

Canada won't fall victim to foreclosure wave: Report

John Shmuel, Financial Post 

Canada's housing market is expected to cool off this year and next, but isn't at risk of falling victim to a U.S.-style foreclosure crisis anytime soon, according to a new report by debt-rating firm DBRS Ltd.

DBRS said in the report that Canada will continue to fare well in comparison to its neighbour to the south when the Canadian housing market corrects itself and interest rates are tightened. That is because lending practices here are much more sound than in the U.S.

"The likelihood of us having the kind of situation they had in the U.S. is extremely low," said Jerry Marriott, managing director of structured finance at DBRS . "It's a combination of the lending practices prior to the peak in 2007 - they were more restrained, so there were better underwriting practices in Canada. We also think there are a number of factors in the Canadian market which have lent themselves to more prudent lending."

Those factors includes less aggressive lenders in the market, as well as systems designed to keep people paying their mortgages.

Mr. Marriott said that a cooling effect is gradually taking hold in the housing market as credit availability begins to tighten, and the HST factors into home buying decisions in Ontario and British Columbia.

That means there's a greater likelihood this year that there will be a correction in housing prices rather than a continued increase. Mr. Marriott said the DBRS expects the market to cool throughout the year and continue to cool into 2011. That echoes analysts expectations, who also expect prices to drop as well. A recent report by TD Bank predicts prices will fall by 2.7% in 2011.

"If you add up the factors you would look at as to whether there's going to be further price increases or the potential for a correction, we don't see there's a lot of factors supporting further price increases," Mr. Marriott said. "But there are a number of factors that show there might be some moderation in housing prices."

That may bode well for potential buyers after a report by CIBC this week said that on average, Canadian home prices are currently 14% over their "fair" value - that represents about 1.5 million homes, or 17% of all dwellings.

The report also highlights that Canadian households continue to have a particularly high level of debt, something that the DBRS notes is part of an ongoing trend. But it tempers that by adding that household debt is not as worrying as some analysts have suggested.

"We think the measurement of household leverage is subject to a fair amount of interpretation," said Mr. Marriott.

For instance, the debt-to-disposable income shows Canadians are generally more indebted than Americans - however, the report outlines that this doesn't reflect certain differences between the two countries that affect income, such as the fact that the U.S. has lower taxes but that Americans pay more money toward their health-care bills.

"At the end of 2009, Canadian households remained financially less leveraged by 10% to 45% compared with U.S. households," the report said. Overall, after adjustments, Canada had a household liabilities-to-total gross income ratio of 116.8% at the end of 2009, while the United States's ratio was 161.5%.

But Canadian household debt is growing faster. Household liabilities increased by 29.5% in Canada between 2007 and 2009. In the use, household debt grew just 5.3% during the same period.

Overall, mortgage lending in Canada reached $958.8 billion at the end of 2009. That's more than double the $414.1 billion ten years ago. When including home equity lines of credit, outstanding mortgage-related credit was more than $1 trillion.
Read more: http://www.financialpost.com/personal-finance/mortgage-centre/story.html?id=3081970#ixzz0pVaLC07i

 

 

Carney's big call

Paul Vieira, Financial Post 

Ottawa -- Bank of Canada governor Mark Carney has had a busy time of it since taking over as the country's central banker 27 months ago, mostly tackling the financial crisis, mapping out the road to recovery and reassuring Canadians that at the end of the day the bank's extraordinary policies would work.

The one thing he has yet to do during his term, however, is raise interest rates. That might be about to change on Tuesday. If he does pull the trigger - and that is what most analysts expect - it won't be after grappling with competing forces that convey two starkly different messages about the economic outlook.

"We are at point where it is a tug of war between structural issues that are facing the eurozone and a very strong economic cyclical backdrop," says Stéfane Marion, chief economist at National Bank Financial.

Weighing on the governor are the economic data, which call out for a rate hike - as much as 50 basis points, some reckon. The data have been consistently strong and surprising to the upside. Job creation is in full swing, with a record 109,000 workers added to payrolls in April; consumers are buying up goods at a healthy pace, tax credits or not; corporate profits are rebounding to pre-recession levels; and inflation is creeping closer to the central bank's preferred 2% target. The sterling fundamentals prompted the central bank last month to ditch its conditional commitment to keep its policy rate at a record low 0.25% until July, leading traders to price in a nearly 100% chance of a rate hike on June 1.

That was until sovereign debt worries exploded in Europe, once Greece formally asked for international help days after the last Bank of Canada rate decision. That sparked an across-the-board retreat in global equity markets, down 9.3% since the beginning of May, as traders sold stocks and poured into risk-averse U.S. treasuries and other government securities on fears that another credit crunch was at hand. Mr. Carney is likely aware of this better than most, given his capital markets background from Goldman Sachs.

The most worrying sign on Mr. Carney's radar screen might be the small but steady increases in the cost of borrowing among banks, a signal European lenders are finding it tough to access cash from their peers on concern over how much Greek, Portuguese and Spanish debt they hold.

In the end, the consensus is Mr. Carney is leaning toward a rate hike - a modest one, though, of 25 basis points. The thinking is, an ounce of prevention now is worth a pound of cure later.

"We can't look at things in a vacuum, because there are so many other factors besides Europe's issues" says Jonathan Basile, an economist with Credit Suisse in New York who closely watches Canadian markets. "The truth is the macroeconomic evidence is outweighing the financial risks right now."

The last time the Bank of Canada raised its benchmark rate was in July 2007, by 25 basis points to 4.5%. At the time, former governor David Dodge said the economy was operating above its production potential, and inflation was likely to stay above its 2% inflation target for longer than forecast.

Little did Mr. Dodge know that the U.S. subprime crisis would morph into the worst financial crisis since the Great Depression, roiling markets and economies around the world. This is why Europe's recent fiscal woes have triggered a case of nerves, and might prompt Mr. Carney to rethink any rate move.

"The Bank of Canada wants to raise rates, but it doesn't have a crystal ball," CIBC World Markets said in a note to clients. "It can't be certain that the recent financial market downturn isn't going to morph into something more severe that would make a rate hike look out of place."

There's another school of thought, though, that suggests markets have overreacted to a regional problem. In this context, it is key to remember the Bank of Canada didn't expect the eurozone to contribute much to global growth, envisaging only 1.2% expansion this year and 1.6% in 2011.

"The European picture will calm down and people will realize it is not as dramatic as being played out," says Carlos Leitao, chief economist at Laurentian Bank Securities.

Yes, he acknowledges, the debt-ridden southern European economies have tough years ahead. But other countries, led by Germany and France, are going to capitalize on the lower euro and boost their exports to emerging economies and North America, which will help offset the drag from the so-called Club Med nations.

Besides Europe, Mr. Carney has other factors to consider Canada's sovereign debt levels are indeed much better than the industrialized world, as our politicians like to remind us. But the amount of debt held by households, measured as a percentage of disposable income, stood at a historical high of 146% - of which 98% is mortgage related - at the end of 2009, rating agency DBRS estimates. That would put Canadian households ahead of the United States but behind Britain on this measure. A rate hike would signal it might be time to live more modestly and refrain from too much debt-financed consumption (which helped fuel those nasty asset bubbles that central banks may want to pay more attention to in the aftermath of the subprime debacle).

Mr. Carney's other challenge is to explain why, and what's ahead. He has come off a period where he provided extraordinary guidance to markets. Don't expect similar language from the governor.

If anything, Mr. Marion warns the central bank should refrain from using the type of guidance the U.S. Federal Reserve deployed in 2004, when it signalled a period of "moderate" rate hikes were in the offing.

In retrospect, the Fed's use of the word moderate "encouraged more financial excesses," leading to the subprime bust, Mr. Marion says. "Carney doesn't have to be brusque about it. He has the luxury to start slowly, and leave his options open," from pausing should Europe deteriorate to hiking aggressively, by 50 basis points, if conditions warrant.

Mr. Carney reminded us recently that "nothing is pre-ordained" at the Bank of Canada. He's likely to drive home that point on Tuesday, rate hike or not.
Read more: http://www.financialpost.com/news-sectors/story.html?id=3084621#ixzz0pVYuP0cD

 

 

New Changes

Only 5% of new high-ratio mortgages have had variable rates, versus 15% six months ago.*

People are avoiding variables not just for fear of rising rates, but because many no longer qualify. This was not to be unexpected (see: The 5-Year Funnel). Up until April 18, a variable-rate mortgage required you to prove you could afford payments based on a 3-year discounted rate (e.g., 3.75%).  Now, the government requires variable-rate applicants to prove they can afford payments at the Big 5 banks' posted qualifying rate (6.10% today). That makes it distinctly harder to keep your debt ratios within lender limits. The kicker is that you can’t change lenders at renewal without re-qualifying. Therefore, if you don’t have 20% equity at maturity you could be stuck in another 5-year fixed mortgage (possibly at your existing lender’s “rack rate”). If you instead want to switch to a variable or 1-4 year fixed term, your debt ratios will have to fit under the much stricter government guidelines at that time.Of course, those guidelines will get tougher if fixed rates rise. Today’s 6.10% qualifying rate is 435 basis points above what most borrowers are getting on new variable-rate mortgages. However, in years prior, most lenders considered 150-200 bps a reasonable number. This is all pertinent because, as experts agree, variable and short-term mortgages are often the best way to keep lender’s hands out of Canadians’ pockets. With many financially stable Canadians now being unable to choose variable/short terms, lenders will get richer and many borrowers will get poorer. It’s therefore somewhat intriguing that the federal government chose the posted 5-year fixed rate for its new qualifying rate. We heard they were also considering a spread above prime (like prime + 3%). It makes one curious about the logic that went into the final decision. Is there a real threat of sustained 4.35%+ higher rates?  Or did the powers that be set the bar overly high to herd people into 5-year fixed mortgages—which just happen to be more profitable?

Maybe the latter is just too cynical a thought…

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* Source: Genworth Financial Canada’s Peter Vukanovich, as quoted in the The Gazette; Reporter: Garry Marr)

 

 

 

 

 

What the new mortgage rules mean for you

 

                     A breakdown of the tighter mortgage rules going into effect this April.

 

                 

                              

 

 

  

      March 30, 2010

• Various lenders raised rates yesterday, and more will do so in the next 48 hours. There’s still time to lock in a decent fixed rate…but probably not much.
• “[Yesterday’s 60 bps hike] is actually a fairly large increase reflecting what's happening in the bond market lately.” - CIBC economist, Benjamin Tal (Vancouver Sun).
• Discounted 5-year fixed rates will probably land in the low 4% range once all lenders are done raising their rates. That’s still way below the 10-year average of 5.22%.
• ING’s self-serve online rate holds have been popular as people rush to secure a rate.  If you get one, keep two things in mind:
  • Once your application turns "live" with ING (i.e.,  once you submit a formal application), you'll then need to qualify under ING’s normal lending guidelines.  If you don't meet its lending criteria at that time, you won’t be approved.  That's why it's a good idea to work with an ING-approved mortgage planner to get yourself pre-qualified.
  • If you don’t have time to consult a mortgage planner before submitting your ING rate hold, call one after. If you have an ING-broker close your rate hold, you’ll get professional mortgage advice and the potential for a slightly better rate.
• If you’re in a “prime plus” variable mortgage (like prime + .25% for example), talk to a mortgage planner about the options. If you’re committed to staying variable instead of locking in, have your advisor run the numbers to gauge the benefit of switching to a prime - .50% variable.
• "No one is expecting rapid rate increases from the Bank of Canada," says BMO’s director of mortgages, John Turner. "But for those customers thinking about buying, interest rates are as low as they ever will be…” (Vancouver Sun)
• “It's possible that we'll get a 10 or 15 basis point correction, but the direction [of rates] is up, not down…This interest rate cycle has turned…The next move will probably be another increase, although it won't be 60 basis points. It will be much more moderate.” - Peter Routledge, senior VP at Moody's (CTV)
• “I can’t see any [rate] movement back down anytime soon.” – Judith Cane of the Financial Advisors Association of Canada (Money)
• If you’re thinking of breaking your fixed mortgage for a lower rate and you have an IRD penalty, now is the time to do it. You can lock in a sub-4% fixed rate today, and then when rates rise, your IRD penalty will drop and save you some money.
• Here’s a short primer on what influences mortgage rates.