Tuesday, July 19, 2011

Bank Of Canada Announcement - Rates to Hold, for Now

Although this is something Canadians are getting very familiar with, there is a distinctly different flavour with Mark Carney’s latest decision this morning to hold rates again- for the seventh consecutive time.

In a press release this morning, they said: “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.”While this is not entirely unexpected, it is somewhat of a surprise as well- as there was wildly varying predictions this time around as to what direction rates were going to go- if any.
The real difference with this rate hold is that Carney is giving indication that while rates are steady today,their run near the bottom is nearly over.

Many expected rates to stay put, including many economists and several of the major banks, because of global financial unrest, and also because of rising inflation and consumer prices.

However, there are many indications that the economy is doing very well, including the recent release of jobs data- that would suggest that the ability to sustain a rate hike is emerging, if not already established.
This time around though, Carney pointed to global threats and weaker exports as the main drivers for reasons to hold rates, as well as rising consumer prices:

“The U.S. economy has grown at a slower pace than expected and continues to be restrained by the consolidation of household balance sheets and slow growth in employment. While growth in core Europe has been stronger than expected, necessary fiscal austerity measures in a number of countries will restrain growth over the projection horizon.”

“Total CPI inflation is expected to remain above 3 per cent in the near term, largely reflecting temporary factors such as significantly higher food and energy prices. Core inflation is slightly firmer than anticipated, owing to temporary factors and to more persistent strength in the prices of some services. Core inflation is now expected to remain around 2 per cent over the projection horizon.”

Carney too, gave indications today that there is expectation of increases in corporate and household spending, and that net exports are set to increase as well. Similarly, although they recognize the threat of a debt crisis in Europe, they believe that it is generally well contained.

 These are all factors suggesting that a rate hike should not be far around the corner- perhaps as soon early this fall.

As Leslie Penney, Vice President - Business Development, APlus Mortgage Group/Mortgage Alliance told Propertywire.ca, despite the varying predictions, the outcome is not overly surprising:"It didn't come to much of a surprise that Carney held the overnight rate at 1%. There is just too much concern over the sovereign debt crisis in Europe and the current issue in the United States regarding the country's debt ceiling and whether or not the country will default on its debt. With only two weeks left until the deadline, the US is close to defaulting, which could possibly spiral the global economy into another crisis. Chances of this happening are slim, but it's a hot topic right now. With all of this, it's no surprise Carney stood on the sidelines this time around."

"If it's not the last meeting that Carney holds rates, it's close to it. The key takeaway is that Carney signaled that any government stimulus 'will' be withdrawn, rather than 'eventually' withdrawn. That means he's close to pulling the plug. We are looking at growth and employment numbers for the second half of the year and if it remains strong, we may see rates move before year end."

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