Today, the Bank of Canada announced that it is raising its overnight rate by a quarter point from 0.75% to 1.00%. This will impact the Prime lending rates of the Banks; Prime will increase from 2.75% to 3.00%.

The Bank now expects the economic recovery in Canada to be slightly more gradual that what they had previously anticipated in July primarily due to a lack-lustred economic recovery in the United States due to high unemployment. In Canada, the Bank of Canada expects consumption growth remaining solid and business investment to rise strongly due to accommodative credit conditions. Quite interesting especially when we saw, yesterday, that gold hit an all-time high (currently $1,260 per ounce) due to renewed fears surfacing about European Banks. Inflation is still in line with the Bank’s expectations (and this is always good news).

Most economic commentators are of the opinion that the Bank of Canada will not increase the overnight rate for some time now. Time will tell and the next scheduled announcement is October 19, 2010.

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.

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.

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.’

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.

While significant fragilities remain, global economic developments have been slightly more positive and the global outlook has improved modestly relative to the Bank’s projection in its October Monetary Policy Report (MPR).  Core inflation in recent months has been slightly higher than the Bank had projected, although total CPI inflation remains close to projections.   The Bank continues to expect economic growth to become more solidly entrenched over the projection period and inflation to return to the 2 per cent target in the second half of 2011.

The risks to the outlook for inflation continue to be those outlined in the October MPR. On the upside, the main risks are stronger-than-projected global and domestic demand. On the downside, the main risks are a more protracted global recovery and persistent strength in the Canadian dollar that could act as a significant further drag on growth and put additional downward pressure on inflation.  The Bank’s targeted inflation rate is 2.00%.  The Bank judges the overall risks to its inflation projection are tilted slightly to the downside.  Total CPI is currently at 0.10%.

The next scheduled date for announcing the overnight rate target is 19 January 2010.

The Bank of Canada today announced that it is maintaining its target 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.

Recent indicators point to the start of a global recovery and there is evidence of economic recovery in Canada. This growth is supported by monetary and fiscal stimulus, increased household wealth, improving financial conditions, higher commodity prices, and stronger business and consumer confidence.  However, heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures. The current strength in the dollar is expected, over time, to more than fully offset the favourable developments since July.

Growth is expected to be slightly higher in the second half of this year than previously projected but to average slightly lower over the balance of the projection period. The Canadian economy is projected to grow by 3.0 per cent in 2010 and 3.3 per cent in 2011, after contracting by 2.4 per cent this year. This is a somewhat more modest recovery in Canada than the average of previous economic cycles. The Bank of Canada expects inflation to return to the 2 per cent target in the third quarter of 2011, one quarter later than in July’s projection.

Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.

The next scheduled date for announcing the overnight rate target is 8 December 2009.

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 global economy is still in a recession but there are signs that economic activity has begun to expand in many countries in response to the fiscal and monetary policies that Central Banks have introduced in order to stabilize the global financial system.  The Bank of Canada projects that the Canadian economy will contract by 2.3% in 2009 and then grow by 3.0% in 2010 and 3.5% in 2011.
What is pertinent about the Bank of Canada’s announcement of today is that they reiterated their conditional commitment to hold the current policy rate of the overnight money at 0.25% till the end of the second quarter of 2010.  This bodes well for rates remaining low over this period.  It is also significant that inflation has dropped by 0.30% in June and the Bank of Canada sees inflation dropping even further.  This is all good for rates remaining low.  Inflation is expected to return to the 2.00% target in the second quarter of 2011.
So, this announcement really speaks to the overnight lending rate (i.e. the rate that the Bank of Canada lends to Chartered Banks) and this affects the prime lending rate.  You may have noticed that the fixed rate mortgages ramped-up quickly and aggressively in the recent past.  The fixed rates are funded on the bond market (totally different to the money market) and this market can be quite volatile.  In the last 10 days we have seen this market settle down a bit and the fixed rates have retreated a little.  On the variable rate scenario, we have also seen some cost changes over the last 14 days: the premiums (remember the days when variable rates were offered at a discount to Prime - and that was not too long ago) have started decreasing as liquidity returns to the market.  This trend will continue over time.
The next Bank of Canada announcement is scheduled for September 10, 2009.

The Bank of Canada kept its key lending rate at a record low as expected, cautioning that the strengthening currency could “fully offset” recent improvements in financial markets and consumer confidence, and prolong the recession.  Policy makers also reiterated they have no plan to change the rate over the next year, and that they still have flexibility to use other measures should more stimulus be needed.

“If the unprecedentedly rapid rise in the Canadian dollar, which reflects a combination of higher commodity prices and generalized weakness in the U.S. currency, proves persistent, it could fully offset these positive factors,” the Bank of Canada said in a statement today from Ottawa.

Consumer and business confidence, prices for exported commodities and financial conditions have all improved in the past few weeks, but still, the recovery of the global and Canadian economies will be more muted than usual.  Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.  The bank retains considerable flexibility in the conduct of monetary policy at low interest rates.

The next interest rate announcement will be on July 21st.

To see TD Economic’s report on the BoC announcement, please click on the link below:

TD Economics Commentary

The Bank of Canada today announced that it is lowering its target for the overnight rate by another one-quarter of a percentage point to 1/4 per cent.  The BoC went on further to state that, should inflation remain under control, then they would hold their current policy rate till the end of the second quarter of 2010.

This lowering of the overnight rate has been brought about by the intensified global recession and the relentless sense of uncertainty in world markets and, both consumer and business sentiment.  The recession in Canada will be deeper than expected with the economy expected to contract by 3.0% in 2009. The Bank now expects the recovery to be delayed until the fourth quarter and to be more gradual.

The continued fear amongst economic commentators has been that inflation would rear its ugly head due to all this monetary stimulus.  The BoC, however, expects core inflation to diminish through 2009 gradually returning to the 2.0% target in the third quarter of 2011.

The next scheduled date for announcing the overnight rate target is 4 June 2009