As was expected the Bank of Canada, today, announced that it is raising its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. This against the backdrop of recent fears, from some economic commentators, of a double dip recession in the world economy.

The Bank of Canada raised its benchmark interest rate by 0.25% - this is the first increase since 2007 - saying inflation is unfolding as expected and that spillover from the European debt crisis has been limited, while stressing there remains “considerable uncertainty” about an “increasingly uneven” global recovery.

In a statement on the move, Mr. Carney and his rate-setting panel sought to emphasize that investors should not necessarily interpret the increase as the first in an uninterrupted series.

The Canadian economy, which on Monday posted a whopping 6.1-per-cent annualized growth rate for the first quarter – the fastest in more than a decade – is “unfolding largely as expected,’’ the bank said, led mostly by a hot housing market, higher incomes and a labour-market recovery that have helped fuel consumer spending.

Still, the central bank suggested that household spending and the economy will slow in the coming months as consumers deal with higher borrowing costs and try to limit or reduce their debt loads and as government stimulus spending fades. As a result, an “anticipated pickup in business investment will be important for a more balanced recovery,’’ the bank said.

Inflation, which the central bank has been watching closely for months, has been in line with policy makers’ projections to exceed 2 per cent this year and reflects a combination of strong domestic demand, slowing wage increases and “excess supply’’ leftover from the recession.

Given today’s rate increase look to the bond market yields increasing over the short term i.e. fixed rates will invariably increase.

The next scheduled date for announcing the overnight rate target is 20 July 2010.

Tavia Grant

Globe and Mail Update Published on Sunday, May. 30, 2010 8:10PM EDT Last updated on Monday, May. 31, 2010 7:07AM EDT

Nearing one of the biggest decisions of his tenure as Governor of the Bank of Canada on Tuesday, Mark Carney will be equipped with a mountain of information on the latest economic trends, produced by the central bank’s small army of economists and researchers. He will have huddled closely with his top lieutenants, discussing the state of financial markets and key factors affecting the economy, such as the housing sector or Europe’s current fiscal woes.

But for all the deliberate information gathering and shared input at the central bank, Mr. Carney wastes no time as he calls the shots, say those who have worked with him.

“As an academic, I found it a bit difficult to keep comments to just three minutes,” says Angelo Melino, a University of Toronto professor who was the bank’s special adviser in 2008 and 2009, through the chaos of the financial crisis. “[Mr. Carney] is very business-like and quick moving. He would no doubt listen, but was very willing to challenge you as well. If you said something that didn’t quite fit together, or fit with his views, he’d have no qualms about responding. He was very much in control.”

Eight times a year, the Bank of Canada issues a decision to hold, raise or cut interest rates it charges for short-term loans to banks. The decision is a product of intensive research and collaboration at the bank’s Ottawa headquarters at 234 Wellington St.

Rate-related discussions ramp up on the Wednesday before the announcement. The governing council, now comprised of Mr. Carney and deputy governors Jean Boivin, Pierre Duguay, John Murray and Timothy Lane, is briefed on four major topics: risks and the likely path for the economy; the bank’s business outlook survey and regional views; credit and money conditions; and market expectations on interest rates.

Research has been assembled by some of the bank’s 200 economists and address every aspect of the economy – from GDP reports to car sales, housing starts, employment, trade and retail sales. Bank staff crunches numbers on how alternative scenarios – higher rates, tighter credit or rising oil prices – would play out. Temporary factors are considered, like strikes, weird weather or special car promotions.

Backgrounders are distributed on dozens of issues: whether Canada’s housing market is overvalued, inventory cycles in China, oil forecasts or U.S. auto sales, to mention a few.

“An enormous amount of effort goes into where we are – trying to figure out what’s going on in the economy because of the lags in the information they receive,” Mr. Melino says. “That’s something the bank wants to do better. During normal times it’s not that important but during a crisis, Christ, finding out where you are is really, really important.”

On Friday morning, over coffee, water or juice in the bank’s board room, the council meets with the monetary policy review committee, which includes six special advisers, chiefs of four economics departments, communications officials and financial markets directors in Montreal and Toronto. Up to 22 people attend, BoC spokeswoman Stephanie Bento says.

The meeting lasts about an hour and a half. They discuss any recent developments in financial markets or the global economy, changes in the labour and real-estate market. They talk about the market, and how it might react to various decisions. They discuss how key messages should be communicated.

Then each person in the room airs his or her views and makes a recommendation on interest rate strategy.

Mr. Carney, 45, landed as Governor in 2008. Since then, a string of long-tenured deputies such as Paul Jenkins, David Longworth, Sheryl Kennedy have left. At the end of July, Pierre Duguay will do likewise. A younger guard, including Tiff Macklem who rejoins the bank as senior deputy governor on July 1, has taken the reins.

By all accounts, it’s a place where Mr. Carney is top dog. His tenure has been marked by increased transparency – the bank now publishes four full-blown monetary policy reports a year, for example – and with that also comes heavier workloads.

The bank has also boosted scrutiny in several areas in recent years, such as risk management and global developments.

Europe will be a key focus this time round, says Sheryl King, who was an economist at the central bank for eight years and is now head of economics at Merrill Lynch Canada.

“They’re going to be looking at possible channels of contagion. Is Europe going to be weaker? Are banks safe, are they liquid? The issue becomes if it’s not contained there, does it spread elsewhere? Everyone’s thinking back to 2008 … those are the types of things they’ll be taking into consideration.”

She describes the tone of these briefings as “cordial,” where people are deferential to the chain of command. Though she left the bank before Mr. Carney’s arrival, her sense is “the Governor’s view is the dominant one, and there’s little dissent once he airs it.”

Most of us know that we have a “credit rating”, but not everybody knows what their beacon score is or how it’s calculated.

Your credit worthiness is assessed two ways:

1. Beacon score, and
2. A detailed history.

Credit scores range from 350 (low) to 850 (high), with 750 being the median. The numerical score is calculated on previous payment history, current indebtedness, credit history length, number and frequency of new credit inquiries and, types of credit held.  Two so-called “Beacon killers,” are payments more than 30 days late (even small amounts) and maxed-out credit cards. The detailed history adds personal information, banking information and specifics on accounts and payments.

Repairing your bruised credit may not be easy, but over time it can be done. Here are three strategies I recommend:

1. Pay all bills on time – late payments hurt ratings.
2. Keep credit balances below 75% of the maximum.
3. Avoid applying for additional credit; too many applications in a short period signals financial difficulties.

You can pull your own credit bureau without it negatively impacting your credit score: https://www.econsumer.equifax.ca/ca/main

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

Even with the somewhat stronger than expected global economic growth and whilst the extra-ordinary stimulus from monetary and fiscal policies continues to support and aid many countries the recovery in the major industrialised countries is still expected to be somewhat subdued. There is still considerable uncertainty as to the durability of the world-wide economic recovery.

In Canada, however, the economic recovery is proceeding at a quicker pace with GDP expected to be around 3.70% for 2010 and then slowing to 3.10% in 2011 and 1.90% in 2012. The Bank anticipates no problems on the inflation front and sees the Total CPI inflation to be slightly above the 2.00% target over the coming year but returning to below the target of 2.00% in the second part of 2010. This is rather significant for rates: their upward movement would be slowed down by this.

Given the afore-going, the Bank has decided to remove their conditional commitment of freezing the overnight lending rate t 0.25% and will continue to watch the economic growth (both locally and globally) and inflationary pressures before deciding on the timing and the extent of reducing their monetary stimulus i.e. increasing the overnight lending rate.

Note, this is not all doom and gloom. The bond market has reacted rather strongly to the expectation that the Bank will increase the overnight lending rate (starting in July) and this has led to a rather significant increase in bond rates over the last 2 weeks i.e. the fixed rate mortgages have increased. However, overall the rates are still low. The next scheduled date for the announcement of the overnight lending rate is June 1, 2010.

By Luann Lasalle, The Canadian Press

MONTREAL - Younger Canadians are expected to lead the way with home buying this year as they take advantage of low interest rates, new jobs and what they consider “good prices,” a bank survey says.

The survey for the Royal Bank suggested that 15 per cent of Canadians between the ages of 18 and 24 were very likely to buy, almost double from eight per cent in 2009.

It’s a marked shift in the attitudes of younger Canadians, who have tightened their budgets over the past few years to cope with tough jobs markets and the recession.

“Our poll found that 35 per cent of younger Canadians, between the ages of 18 and 24, are intending to buy a home due to good real estate prices,” Marcia Moffat, RBC’s head of home equity financing in Toronto, said Monday.

The national average price for a home was $328,537 in January, according to the Canadian Real Estate Association.

Thirty-one per cent of 18 to 24-year-olds surveyed in the online poll said they would buy a house because of a new job. The survey also found 22 per cent in that young age group wanted to buy a home because they considered interest rates were good.

CIBC World Markets senior economist Benjamin Tal said more young people are getting into the real estate market, taking advantage of low interest rates, lower down payments and more years to pay off their mortgages.

Tal said he estimates the young people getting into the market as a bit older, between the ages of 22 and 28.

“Basically parents are begging their kids to buy now because they remember when they were paying 12 to 15 per cent mortgage interest,” Tal said.

“So there’s a sense of urgency to get into the market and young people are a part of it.”

Tal described the coming real estate market of the next three or four years as “boring.”

“I think that what we are doing now is that we are basically stealing activity from the future.”

The RBC survey also suggested that overall attitudes are changing as more Canadians return to shopping for homes as the economy recovers, even though it’s considered a seller’s market.

“Confidence in the housing market is back, essentially,” RBC senior economist Robert Hogue said.

Royal Bank said the study found more Canadians are “very likely” to buy a new home in the next two years.

Ten per cent of the 2,047 people of all ages surveyed for the study said they planned to buy a home within two years - up from seven per cent two years ago.

The RBC study also found that 91 per cent of Canadian homeowners believe a home is a good investment, the highest level in 12 years.

“At this stage last year, there was doom and gloom all around and it definitely affected the housing market,” Hogue said.

One-quarter of those surveyed, 26 per cent, said they expect their home to be their primary source of income when they retire.

However, the surge in optimism doesn’t necessarily mean that Canadians have forgotten about past economic troubles.

The survey found they are still more cautious when it comes to mortgages. Forty-four per cent of those surveyed who plan to buy a home in the next two years said they would take a fixed-rate mortgage.

Also on Monday, the latest new homes numbers showed that the annual rate of housing starts were up in February.

The Canada Mortgage and Housing Corp. said that the seasonally adjusted annual rate of housing starts reached 196,700 units in February, an increase from 185,400 in January 2010.

Senior CMHC economist Bill Clark said the market is seeing a lot of “catch-up” and consumers in Ontario and B.C. are likely trying to avoid the harmonized sales tax before the summer.

“So if you roll all of that together it’s really sort of one big recipe for housing starts to go up,” Clark said.

The report showed the gain was concentrated in the multiple starts segment, particularly in Toronto.

Urban starts increased nine per cent to 179,100 units in February.

Urban multiple starts increased by 19.1 per cent to 89,900 units, while single urban starts increased by 0.5 per cent to 89,200 units.

The annual rate of urban starts increased 28.6 per cent in Ontario in February, 14.3 per cent in Atlantic Canada, 10.8 per cent in the Prairies and by eight per cent in British Columbia.

In Quebec, urban starts fell 14.1 per cent.

Rural starts were estimated at a seasonally adjusted annual rate of 17,600 units in February.

Here is an extract of the Bank of Canada’s announcement of this morning….

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

The ongoing global economic recovery is being driven largely by strong domestic demand growth in many emerging-market economies and supported in advanced economies by exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems. The level of economic activity in Canada has been slightly higher than the Bank had projected in its January Monetary Policy Report (MPR). The economy grew at an annual rate of 5 per cent in the fourth quarter of 2009, spurred by vigorous domestic spending and further recovery in exports.

The underlying factors supporting Canada’s recovery are largely unchanged - policy stimulus, increased confidence, improved financial conditions, global growth, and higher terms of trade. At the same time, the persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags on economic activity in Canada.’
In Benjamin Tal’s (CIBC Senior Economist) Weekly Market Insight, he points out that any move by the Bank of Canada ahead of the Federal Reserve poses significant risks for Canada. Below, is an extract of some of the pertinent points which I thought you would find of interest:

‘This is a risky move given that both in 1992 and 2002 the Bank moved independently of the Fed, only to reverse the decision a few months later. The most likely scenario is that the Bank will move by 50-75 basis points and then will pause until 2011 and continue to hike alongside the Fed. The reason for the limited hike in 2010 is that the ongoing recovery in the Canadian economy will not be linear. The first two quarters of the year will be strong, reflecting fiscal stimulus from both sides of the border, a rebounding inventory cycle and strong credit growth in Canada. These factors, however, will fade in the second half of the year, with overall GDP growth expected to average less than 2% vs. more than 3% in the first half.

As for inflation, the Bank of Canada is projecting core inflation to reach its target rate of 2% by mid-2011. But the core rate has already reached 1.9% last month. Is the Bank of Canada wrong? The short answer is no. The 1.9% advance in the core rate reflects a very soft base period (rates are calculated on a year-over-year basis and January of 2009 saw a notable decline in prices). This means that the coming months will see a much lower inflation rate. The reality is that the underlying inflation rate in Canada is well below 1.5%. So we still have a lot of time until we reach the Bank’s target.’

By Julian Beltrame, The Canadian Press

OTTAWA - The federal government is expected to announce new rules Tuesday that would make it more difficult for first-time buyers to enter Canada’s hot housing market.

Sources have told The Canadian Press that Finance Minister Jim Flaherty is ready to move on the issue because of concern Canadians may be taking on too much debt.

Economists have advised the minister the best way to protect Canadians is to institute a debt affordability test in order to qualify for a Canadian Mortgage and Housing Corp. insured mortgage.

Currently, prospective home owners can qualify for a CMHC insured mortgage if they put at least five per cent down on the cost of a home.

But bank officials say they usually apply a cushion to ensure home buyers have sufficient income to meet payment requirements if floating rates rise, in some cases by more than two percentage points.

Flaherty is expected to make such an income test a condition for acquiring an CMHC insured mortgage.

Another possibility is for the minister to reduce the amortization period from 35 years to 30, which would have the effect of raising monthly payments.

It is believed Flaherty rejected more radical measures to cool the housing market, which has reached record levels in sales and near record levels in average home prices despite the weak economy.

Economists have cautioned the minister against putting on the brakes too strongly. They say raising the minimum downpayment requirement to 10 per cent, one of the suggestions given the minister, could cause a crash in a key mainstay of the fragile economic recovery.

The Bank of Canada has been warning for months that homeowners should ensure they can absorb an increase in their floating rate mortgages once rates start rising, likely as early as this summer.

By the central bank’s own stress test calculation, almost one in 10 households would have a debt-service ratio that makes them vulnerable to economic shocks by the middle of 2012 if current trend continue.

In an address written for deputy governor Timothy Lane last month, the bank suggested the government has all the tools it needs to address the problem.

“An array of supervisory and regulatory instruments can be used by the government to restrain a buildup of systemic risks,” said notes the address.

“These include capital requirements for institutions, leverage ratios, loan-to-value ratios, terms and conditions for mortgage insurance, and a variety of other measures. These instruments can be targeted to risks to the entire financial system that stem from particular markets or institutions.”

There has been much talk of the ‘housing-bubble’ of late and so I thought this article from Sunny Freeman for The Canadian Press would be of great interest to you……
TORONTO — Record home sales last month are based on low supply and high demand and are more likely to drop off this year than inflate a housing bubble that could threaten a fragile recovery, economists say.

A Canadian Real Estate Association report released Friday said December and the 2009 fourth quarter were the best periods on record for home re-sales, while prices also rose sharply from their year-earlier levels.

Meanwhile, strong demand continued to deplete the number of homes for sale and the estimated 5.6 months it would take to sell a house through the Multiple Listing Service in December was less than half the 12.3 months it would have taken a year earlier.

The number of total listings fell 22 per cent in December from the same 2008 period and 12.6 per cent for the year. The imbalance in supply and demand drove the national average price of homes to $337,410 in December, 19 per cent higher than in December 2008, but slightly lower than the 2009 average of $348,840.
Douglas Porter, deputy chief economist at BMO Capital Markets said while high prices caused by strong demand and weak supply could pose a risk to the fragile recovery, he is not willing to jump on the “bubble bandwagon” yet. A bubble occurs when prices increase without any sound underlying fundamentals, he explained, and that’s not the case in Canada’s housing market, which is closely tied to changing interest rates and economic fundamentals.

“We still do have a relatively tight supply situation and exceptionally low interest rates and a mild recovery in the economy, so there are a lot of good reasons why home prices are rising.”

“What we’re seeing is almost textbook recovery,” he said. “The speed of the recovery is mind-boggling, the fact that housing is leading the recovery is really not a surprise… it’s exactly what you’d expect to happen.”
Finance Minister Jim Flaherty said Friday he does not see a housing bubble yet, but he noted the government has many tools at its disposal — from raising down payment requirements on insured mortgages, to lowering amortization periods and urging the banks to be more cautious in their lending — to prevent such a thing from happening. “We don’t want to have a group of house purchasers who purchased houses now at insured mortgages at relatively low rates who would not be able to manage them if rates were to increase later on,” Flaherty said in an interview with Business News Network, a cable TV business channel in Toronto.

“I’ve looked at the numbers with CMHC,” he added. “We’re monitoring it. I do not see evidence of a bubble right now, but we’re going to keep watching it. There are some steps we can take that we will take if it’s necessary.”
The association said 27,744 units were sold across Canada in December, up 72 per cent from the same month in 2008. The year-earlier period saw the lowest sales in a decade in the wake of a global credit crunch and the start of the recession in Canada.

Ottawa — Globe and Mail Update Published on Wednesday, Dec. 16, 2009 12:58PM EST Last updated on Wednesday, Dec. 16, 2009 5:24PM EST

Bank of Canada Governor Mark Carney again warned Canadians Wednesday not to borrow more than they will be able to handle when ultra-low interest rates start to rise, urging households and lenders to act responsibly while debt risks are “still manageable.”

“When risks are still manageable is precisely the best time to act,” Mr. Carney said in the text of a speech he was delivering to a business audience in Toronto. “We must be vigilant, and all parties must fulfill their responsibilities.”

While saying lenders should “actively monitor risk” and not take “false comfort” from mortgage insurance and the past health of household credit, Mr. Carney implored Canadians to “ensure that in the future, when the recovery takes hold and extraordinary measures are unwound, they can still service their debts.”

Mr. Carney’s remarks expand on the central bank’s semi-annual review of the financial system last week, in which he said household debt is now the biggest risk to the country’s financial system, even if it’s still “relatively low” and unlikely to reach levels that could cripple banks’ balance sheets.

That review used a “stress test” to show rising interest rates between mid-2010 and mid-2012 would saddle a growing number of Canadians with debt loads big enough to leave them “financially vulnerable.” At the same time, Mr. Carney said in his remarks that although the Canadian economic outlook has improved, tepid demand in the U.S. for Canadian exports will make the economic recovery not only “more protracted” than usual, but also more dependent on spending at home.

And as the Canadian economy – which resumed growth in the third quarter on the strength of domestic spending – picks up steam, Mr. Carney warned that Canadians may save too little and borrow too much.

Nonetheless, he hinted that he would not seek to rush a return to higher borrowing costs to rein in spending and that monetary tightening won’t come until inflation is closer to the bank’s 2 per cent target.

“Whatever happens, the bank’s monetary policy reaction to consumer behaviour will always be driven by its implications – taken in conjunction with all other relevant factors – for inflation over the medium-term horizon,” he said.

The central bank has made a conditional commitment to keep interest rates on hold until at least the middle of next year.

With the Bank of Canada’s benchmark policy rate at a record low 0.25 per cent since April, cheap mortgage rates, and fiscal incentives such as allowing first-time home buyers to use more of their registered retirement savings as a down payment, have fuelled buying in the housing market and elsewhere in the economy.

In the speech, Mr. Carney pointed to the U.S. subprime mortgage collapse and the subsequent meltdown of that country’s financial system to remind Canadians that growing debt burdens, even if confined to a small slice of the population, can cause problems for the whole economy.

“A shock to economic conditions could be transmitted to the broader financial system through deterioration in the credit quality of loans to households,” Mr. Carney said. “In such an event, increased loan-loss provisions and reduced quality of the remaining loans could lead to tighter credit conditions more broadly.” He also repeated much of the data from his report last Thursday, including the fact that personal bankruptcies in Canada rose this year to the highest level since 1991. In his remarks, he also noted that even as real consumer credit, including home equity lines of credit, declined during the recessions of the early 1980s and 1990s, it’s up 7 per cent in the past year.

In his report last week, Mr. Carney said household debt remains “a key vulnerability over time,” and in the stress test model the central bank assumed that the ratio of debt to income would rise from 1.42, or 1.42 per cent, in the second quarter of this year, to 1.60, or 1.60 per cent, by mid-2012.

To illustrate the point that Canadians’ debt could become a bigger risk once policy makers lift the main interest rate, the bank showed the proportion of households with debt-service ratios higher than 40 per cent of income would rise to 8.5 per cent by the second quarter of 2012, assuming the central bank’s rate is 3.2 per cent. That share would climb to 9.6 per cent assuming the central bank’s rate is 4.5 per cent. The proportion of households with more than 40 per cent debt-service costs was 6.1 per cent over the past decade and peaked at 7.4 per cent in 2000.

The central bank’s report said Canadian banks currently have more than enough capital on hand to absorb potential losses, suggesting that even the worst-case scenario in the stress test would fall short of risking a collapse of the financial system.

Addressing the personal savings rate, Mr. Carney said a savings rate at current levels, or slightly lower, is what the central bank is projecting as part of a consumer-led recovery.

When asked about the potential for a bubble in the housing market he reiterated that the central bank’s core focus remains fixed on inflation. “Monetary policy in Canada doesn’t target specific assets or asset prices,” he said. “It will be set to achieve the 2 per cent [inflation] target.”