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As
was widely expected, the Bank of Canada held its benchmark overnight lending
rate steady at 0.25 per cent at its setting on April 20, 2010. The trend-setting
Bank rate, which is set 0.25 percentage points above the overnight lending rate,
remains at 0.5 per cent.
With
the Bank having dropped its commitment to stay on hold until at least the second
half of the year conditional on the outlook for inflation, financial markets now
expect the Bank to raise rates at its next at its next fixed announcement date
on June 1st.
The
Bank raised its forecast for economic growth this year from 2.9 per cent in the
January Monetary Policy Report to 3.7 per cent, attributing the more
“front-loaded” profile for growth to “stronger near-term global growth” and
“very strong housing activity”. However, the Bank also cut its forecast for
Canadian economic growth, based in part on an expected decline in housing
investment “over the remainder of 2010 and well into 2011.”
The Bank noted that
the economy still faces headwinds from the strength of the Canadian dollar, weak
U.S. demand, and “Canada’s relatively poor relative productivity performance”.
The Bank moved the
goalposts forward as to when it expects the economy to return to full potential,
now forecasting the second quarter of 2011. The Bank had previously forecast a
return to potential by the third quarter of 2011. This is another signal that
rates will have climb sooner in order to fight inflation.
The Bank said core
inflation had been somewhat firmer than projected in January, but noted that
this was due to temporary factors. The core rate is expected to ease slightly in
the second quarter of 2010 and to remain near 2 per cent throughout the rest of
the projection period. Total CPI inflation is expected to be slightly higher
than 2 per cent over the coming year, before returning to the target in the
second half of 2011.
In previous
announcements, the Bank had noted that it believed the balance of risks to the
outlook to be tilted to the downside. At its last announcement, the Bank judged
those risks to be balanced. In its Monetary Policy Report released on April 22,
1010, the Bank judged risks to the inflation outlook as remaining elevated but
“roughly balanced over the projection horizon.”
“The April interest
rate announcement all but guarantees the Bank will raise rates in June,” said
CREA’s Chief Economist Gregory Klump.
As
of April 19th, the advertised five-year conventional mortgage rate
stood at 5.85 per cent. This is up 0.4 per cent from one year earlier, and
stands 0.46 per cent above where it stood when the Bank made its previous
interest rate announcement on March 2, 2010.
Improving credit
market conditions have enabled lenders to reintroduce discounts off posted
mortgage interest rates. Discounts of about one percentage point can be
negotiated, depending on lender-client relationship.
http://creastats.crea.ca/natl/interest_rate_trends.htm
(CREA
03/02/2010)
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