Carney Says Don't Take Rate Hike For Granted.

By Ka Yan Ng

CHARLOTTETOWN Prince Edward Island (Reuters) - Bank of Canada Governor Mark Carney cautioned investors on Wednesday not to take another interest rate hike for granted, saying volatile global conditions meant no particular path for monetary policy was preordained.

The central bank raised its key rate by a quarter point on June 1 to 0.5 percent, becoming the first in the Group of Seven wealthy countries to do so, and markets are pricing in a second rate hike on July 20.

"The bank must balance the competing influences on Canadian activity and inflation of momentum in domestic demand and the increasingly uneven global recovery," Carney said in a speech in Charlottetown, Prince Edward Island.

"In light of the scale and volatility of these conflicting forces, it should be evident that no particular path for monetary policy is preordained."

Carney said the bank will need to be agile and take a subtle approach to monetary policy.

The central bank's next rate announcement is on July 20.

Yields on near-term overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, showed markets see an 83.08 percent chance the bank will tighten rates further in July. This was down from 83.49 percent just before Carney's speech.

The Canadian dollar rose to its highest level since May 14 just after Carney's speech was released. It climbed to C$1.0224 to the U.S. dollar, or 97.81 U.S. cents, then pared gains to sit almost unchanged from Tuesday's close at C$1.0251, or 97.55 U.S. cents.

Canada's economy has recovered faster than predicted, fueled largely by consumer spending, and the bank expects it to be the fastest-growing G7 country over the next two years.

A cornerstone of the Canadian economic recovery had been a sturdy residential housing sector, but statistics earlier in the day showed the sector was cooling further. Sales of existing homes in Canada fell 9.5 percent in May from April, data showed.

Carney noted that the central bank's most recent forecast projected housing market activity would slow "markedly" for the balance of the year and that the latest resale numbers are consistent with that.

He also reiterated that growth would be handed off to the private sector as government stimulus winds down.

One of the key risks to the economic outlook lies externally as the Greek debt crisis and increasingly multi-speed global recovery could have spillover effects in Canada, Carney said.

"Canada is not an island ... The biggest risks we face are from abroad. Those are the biggest swings," he told reporters following his luncheon speech.

CARNEY TO G20: BE BOLD

To prevent the global recovery from derailing or creating crippling imbalances, Carney urged the G20 group of developing and advanced economies to commit to bold policy changes at their summit in Toronto this month.

"The fiscal challenges that face a number of advanced economies are addressable, but they are addressable with bold action and that was part of the point of the speech. That is very much part of the point of one of the core objectives for Canada at the G20 summit," Carney said.

The required changes include more flexible currencies and reforms to boost domestic demand in emerging economies like China, as well as reducing deficits and enhanced productivity and growth potential in advanced nations.

They must also follow through with their G20 pledge to reform the financial sector to avoid future meltdowns and to resist trade and financial protectionism, he said.

"These are all big decisions. How quickly and how effectively they are taken will influence activity and inflation in Canada and, therefore, the stance of monetary policy," he said.

Carney Says Don't Take Rate Hike For Granted.

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.

Financial Post

pvieira@nationalpost.com

Read more: http://www.financialpost.com/news-sectors/story.html?id=3084621#ixzz0pWefy3St

Carney's Big Call

An interest rate hike this summer?

Don't count on it. For the Bank of Canada to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast

David Rosenberg Published on Wednesday, Jan. 27, 2010

David Rosenberg is chief strategist for Gluskin Sheff + Associates Inc. and a guest columnist for Report on Business

Canadian market watchers will get some good news this week. The predictions for a "blowout" reading on fourth-quarter GDP are already out there and it is likely to be an abnormally strong number. But for anyone who thinks a big number is likely to help lock in a rate hike this summer, I would suggest that is not going to happen. In fact, my view is that the Bank of Canada will not be raising rates until mid-2011 - at the earliest.

This is critical to the outlook for Canadian money market and bond yields since futures have priced in nearly 100 per cent odds of a 25 basis point rate hike this June, and another 25 basis points by September. (A basis point is 1/100th of a percentage point.) The central bank has already told us that its base case is for 2.9 per cent real GDP growth this year and 3.5 per cent next year, with the starting point on the "output gap" being 3.7 per cent ("output gap" is the gap between the actual level of real GDP and where real GDP would be if the economy were at full capacity). Remember that an output gap that big in any given quarter classifies as a 1-in-20 event. Moreover, baselining these expected growth rates against the latest estimates of potential growth puts the output gap at a smaller level of 1.55 per cent this year, narrowing further to 0.25 per cent in 2011.

The history of the Bank of Canada is such that - outside of when it had to defend the Canadian dollar - it typically does not embark on its tightening phase until the output gap is close to closing. Even during the aggressive John Crow era, the bank's modus operandi was to time the first rate hike just as spare capacity was being eliminated, and not much before. On average, the first central bank rate hike following a recession takes place one quarter before the output gap closes (there is still a gap, but it is small at 20 basis points). If such a strategy is replicated this time around - and the cause for being on pause longer in the context of a historic deleveraging cycle is certainly quite strong - then the very earliest the bank will move is the second quarter of 2011.

Under this scenario, based on some back-of-the envelope calculations I just did, the unemployment rate at no time declines below 7.5 per cent through to the end of 2011. The peak in the jobless rate was 8.7 per cent in August, 2009. Going back to prior recessions, the central bank does not begin to tighten rates until the jobless rate is down an average of 150 basis points with a range of 130 basis points to 170 basis points.

Unless the bank wants to be pre-emptive - highly unlikely when it acknowledges in its economic outlook last week that "the recovery continues to depend on exceptional monetary and fiscal stimulus" and that "the overall risks to its inflation projection are tilted slightly to the downside" - then to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast. More to the point, while bored Bay Street economists analyze every word to see if the bank is more or less "hawkish" than in its previous outlook, what is important for investors is to assess the bank forecast and decide what it means for the degree of excess capacity in the economy and what that implies for the future inflation rate.

The bottom line is that even with the fragile recovery, the bank sees more downside than upside risk to its inflation projection, and, to reiterate, for it to start tightening policy until the jobless rate falls below 7.5 per cent would be a break from past post-recession actions.

And whatever future "policy tightening" is needed could also come via the overextended loonie, limiting any need for an interest rate adjustment in the time horizon that the markets have discounted. This is a source of debate on Bay Street, but the bank is still sensitive to the growth-dampening impact of an exchange rate too firm for its own good. To wit: "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," the bank says.

In a nutshell, the Canadian market is already braced for 50 basis points of tightening from the Bank of Canada by September. With that in mind, it is difficult to believe that there is any significant rate risk here; if anything, the surprise will be that the bank is on hold for longer. If that proves to be true, then there is actually more downside than upside potential to Canadian bond yields, particularly at the front end of the coupon curve.

The reason the markets think the bank may pull the trigger is because of this one sentence that shows up in every press statement: "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."

So the central bank has really only given a pledge to keep rates where they are until mid-year. But June is only five months away and so one would have to think that at one of the next three meetings, the Bank is going to have to update this particular sentence or cut it entirely and leave the market without a de facto time commitment. Either way, the moment the bank changes this sentence is the moment the market will put on hold its expectations of a new rate-hiking cycle coming our way.

Until then, homeowners opting for variable rate mortgage financing will likely not have to face the interest rate music.

Average Price Rises 19 Per Cent in November, Compared with a Year Ago

Home sales surge 73 per cent

The Associated Press

Average price rises 19 per cent in November, compared with a year ago

Steve Ladurantaye

Published on Tuesday, Dec. 15, 2009 9:27AM EST Last updated on Tuesday, Dec. 15, 2009 9:39AM EST

National home sales increased by 73 per cent in November from the trough seen a year ago, with Ontario and Quebec hitting new monthly records as buyers took advantage of record low interest rates to secure mortgages.

The national average price gained 19 per cent compared to November 2008, at $337,231, the Canadian Real Estate Association said. Since the beginning of the year, prices have gained 4.4 per cent compared to the same time last year.

“The year-over-year increase in November continues to reflect the high degree to which the average was skewed downward last year by plummeting activity in Canada's priciest markets, and then upward by rebounding activity,” the association said in a statement.

CREA tracked 36,383 deals on its Multiple Listing Service in November. Crediting the housing market for leading “the overall Canadian economy out of the recession,” association president Dale Ripplinger said the numbers were a sign of an entrenched recovery.

“National home sales activity last month shows how strongly the housing market has rebounded since the beginning of the year,” he said.

Investor Education: Should I buy a home now, or wait and save more money? Understanding house prices Is it better to buy a home, or choose some other investment? Charlie's story What makes buying a home different from other investments? What are some renovations that add value to my home?

About 437,507 homes have been sold through the CREA-owned MLS system so far this year, up 5 per cent from last year at the same time, but lower than the previous three years.

One of the main drivers of price increases has been a lack of supply, but higher prices are beginning to draw more sellers into the market. Seasonally adjusted new listings rose 5 per cent from October, to 69,110, in the largest gain since January 2008. There is still a dearth of supply however, with the number of homes for sale 23 per cent lower than they were a year ago.

The association's economist, Gregory Klump, said as prices climb higher, would-be buyers may put off purchases, cooling off a hot market. Higher interest rates, expected in 2010, will also dampen their enthusiasm.

“Deteriorating housing affordability will rein in sales activity as the overall economy further improves and the pool of buyers who qualify for financing shrinks,” he said.

Average Price Rises 19 Per Cent in November, Compared with a Year Ago

Bank of Canada lowers rate to .25%

Bank of Canada lowers overnight rate target by 1/4 percentage point to 1/4 per cent and, conditional on the inflation outlook, commits to hold current policy rate until the end of the second quarter of 2010


OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of a percentage point to 1/4 per cent, which the Bank judges to be the effective lower bound for that rate. The Bank Rate is correspondingly lowered to 1/2 per cent. The deposit rate - the rate paid on deposits held by financial institutions at the Bank of Canada - is left unchanged at 1/4 per cent and provides the floor for the overnight rate. Details of the Bank's operating framework at the effective lower bound can be found here.

In an environment of continued high uncertainty, the global recession has intensified and become more synchronous since the Bank's January Monetary Policy Report Update, with weaker-than-expected activity in all major economies. Deteriorating credit conditions have spread quickly through trade, financial, and confidence channels. While more aggressive monetary and fiscal policy actions are underway across the G20, measures to stabilize the global financial system have taken longer than expected to enact. As a result, the recession in Canada will be deeper than anticipated, with the economy projected to contract by 3.0 per cent in 2009. The Bank now expects the recovery to be delayed until the fourth quarter and to be more gradual. The economy is projected to grow by 2.5 per cent in 2010 and 4.7 per cent in 2011, and to reach its production capacity in the third quarter of 2011. Given significant restructuring in a number of sectors, potential growth has been revised down. The recovery will be importantly supported by the Bank's accommodative monetary stance.

The Bank expects core inflation to diminish through 2009, gradually returning to the 2 per cent target in the third quarter of 2011 as aggregate supply and demand return to balance. Total CPI inflation is expected to trough at -0.8 per cent in the third quarter of 2009 and return to target in the third quarter of 2011. While the underlying macroeconomic risks to the projection are roughly balanced, the Bank judges that, as a consequence of operating at the effective lower bound, the overall risks to its inflation projection are tilted slightly to the downside.

With monetary policy now operating at the effective lower bound for the overnight policy rate, it is appropriate to provide more explicit guidance than is usual regarding its future path so as to influence rates at longer maturities. 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 will continue to provide such guidance in its scheduled interest rate announcements as long as the overnight rate is at the effective lower bound.

To reinforce its conditional commitment to maintain the overnight rate at 1/4 per cent, the Bank will roll over a portion of its existing stock of one- and three-month term Purchase and Resale Agreements (PRAs) into six- and twelve-month terms at minimum and maximum bid rates that correspond to the target rate and the Bank Rate, respectively. These longer-term PRAs will be issued according to the schedule released today.

Today's decision to lower the policy rate by 25 basis points brings the cumulative monetary policy easing to 425 basis points since December 2007. It is the Bank's judgment that this cumulative easing, together with the conditional commitment, is the appropriate policy stance to move the economy back to full production capacity and to achieve the 2 per cent inflation target. The Bank retains considerable flexibility in the conduct of monetary policy at low interest rates, consistent with the framework to be outlined in the Bank's Monetary Policy Report on 23 April.

Information note:

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

Bank of Canada lowers rate to .25%