Bank of Canada Interest Rate Announcement - October 23, 2012

The Bank of Canada once again opted to hold its target for the overnight rate at 1 per cent this morning. Interest rates have been held constant for over two years, the longest such period since the 1950s. The Bank somewhat tempered its bias for higher future interest rates, including a softer statement regarding the appropriateness of a gradual withdrawal of monetary stimulus as excess supply in the economy is absorbed. In a bit of a surprise, the Bank actually raised its forecast for the growth in the Canadian economy this year to 2.2 per cent, but kept its 2013 forecast at 2.3 per cent growth. The Bank judges that at that pace of growth, the Canadian economy will return to full capacity by the end of 2013.

It is our view that monetary policy at the Bank of Canada will continue to be constrained by external events in the global economy and household debt growth at home. While the Bank's preference for tighter policy is clear, it is difficult to make a case for higher interest rates when core inflation is below the Bank's 2 per cent target and already slow economic growth is threatened by global uncertainty. Therefore, we are forecasting that the Bank of Canada will hold its target overnight rate at 1 per cent until mid-to-late 2013 when, conditioned on an improved global economic outlook, it may test the water with a 25 basis point rate increase.

source: BCREA

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Still more new mortgage rules

The government has announced that as of July 9, 2012, new rules will apply to government-backs insured mortgages where the borrower has less than a 20% downpayment.

The government will:
• reduce the maximun amortization (pay back) period on a mortgage to 25 years from 30 years;
• lower the maximun amount borrowers can refinance to 80% loan-to-value (LTV) for 85%;
• limit the Gross Debt Service (GDS) ratio to a maximum of 39% or income. The GDS ratio represents the amount of household income spent on the mortgage, property taxes and heating;
• limit the Total Debt Service (TDS) ratio to a maximum of 44% of income. The TDS ratios represents the amount of household income spent on all debts including the mortgage; and
• limit government-insured mortgages to homes prices at less that $1 million. Buyers of homes prices at $1 million or more must have mumimum 20% downpayment.

The new rules apply to mortgages on residential property with four units or less. They DO NOT apply to:
• mortgages with a 20% downpayment or more which don't require government-backed mortgage insurance;
• borrowers renewing their existing insured mortgages, where there are no new funds being added to the mortgage; or 
• development or construction or multi-unit bulidings of five units or more, owned by a landlord.

Federal Finance Minister Flaherty explained that the reasons for the changes are to "keep the housing market strong, and help ensure households do not become overextended."
This explanation doesn't make sense to Cameron Muir, BC Real Estate Association's chief econmist.
"Instead of helping make the housing market strong, the new rules will erode the purchasing power of first-time buyers who will be restricted to borrowing less money for their homes."
Muir explains the effect of the changes is the equivilant to having a 1% increase in interest rates. This translates into about $50 more on each monthly payment for every $1000,000 of mortgage loan.
What this means is new buyers who can afford a home today with a benchmark price of $625,100 will now only be able to afford a home prices at $550,550 under the new rules. This is a potential loss of $74,550 in buying power.
"Given that the market is already slowing, the new rules are totally unnecessary," says Muir.

What will the new rules cost buyers refinancing a home values at $625,000?
• When refinancing at 85%, the home owner can access up to $531,250.
• When refinacing at 80%, the home owner can access up to $500,000.
What about the new rule limiting mortgage insurance on homes prices a $1 million or more?

Four years of tightening borrowing rules
This is the fourth time in four years that the government has tightened borrowing rules.
• In 2008, the government reduced the maximum amortization period to 35 years from 40, required home buyers to have a minimum downpayment of 5% (compate to the previous 0% down), and introduced new loan documentation standards.
• In 2010, the government required all borrowers to meet standards for a five-year fixed-rate mortgage, reduced the maximum amount borrowers could refinance to 90% from 95%, and for non-owner-occupied investment properties, requred a minimum 20% down payment.
• In January 2011, the government reduced the maximum amortization period for government-backed insured mortgages to 30 years from 35 years and reduced the amount borrowers could refinance to 85% from 90%.

What will the new rules cost home buyers?

Note: calculations assume a 10% downpayment. $625,100 is the benchmark price of a home in the REBGV area as of June 1, 2011.

Article from RealtorLink, July 13, 2012, Volume 13, Number 14


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For the fourth time in as many years, the Federal Government has announced action to restrict mortgage credit. The new measures include:

•The maximum amortization on a prime mortgage will be reduced from 30 to 25 years.
•Mortgage insurance will not be provided for properties valued over $1 million.
•Refinancing has been lowered from a maximum of 85% loan-to-value to a maximum of 80% loan-to-value.
•The maximum gross debt service (GDS) and total debt service (TDS) will be limited to a maximum of 39% and 44% respectively. Currently, GDS does not apply to qualified borrowers with credit scores over 680.

These measures will take effect July 9, 2012.

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The Bank of Canada kept its trend-setting Bank Rate at 1.25 per cent on June 5th, 2012. It was the 14th consecutive policy meeting in which borrowing costs have been left unchanged.

While the text accompanying the announcement left the door open to future rate hikes, the language used was considerably less hawkish than in the previous announcement in April as the Bank sounded a cautious tone over the recent deterioration of the situation in Europe.

The announcement begins, “The outlook for global economic growth has weakened in recent weeks. Some of the risks around the European crisis are materializing and risks remain skewed to the downside. This is leading to a sharp deterioration in global financial conditions.”

The Bank also noted that while the U.S. economy was continuing to expand, albeit modestly, emerging economies were slowing faster and a bit more broadly than expected. That more modest global momentum combined with heightened financial risk aversion has led to lower commodity prices, which is weighing on Canadian exports.

Canadian economic growth was slower than the Bank expected in the first quarter of the year, 1.9 per cent compared to a projected 2.5 per cent; however, underlying economic momentum remains in line with expectations.

That said, the composition of growth has become less balanced. Specifically, housing activity has been stronger than the Bank had been expecting, and despite external risks, business and household confidence has remained resilient amid very stimulative domestic financial conditions.

In contrast, the contribution to growth from government spending is expected to be quite modest going forward in line with recent federal and provincial budgets. Additionally, the recovery in net exports is likely to remain weak in light of the combination of reduced external demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

The Bank said the Canadian economy continues to operate with a small degree of excess capacity, and that even though headline CPI inflation was expected to fall below 2 per cent in the short term due to lower gasoline prices, the core rate inflation was expected to remain around the target 2 per cent mark.

The announcement ended by reiterating that, to the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, the possibility of a rate hike was not completely off the table, but that the timing and degree of any such action would depend heavily upon how current heightened downside risks play out in the months ahead.

As of June 5th 2012, the advertised five-year lending rate stood at 5.34 per cent. This is down 0.1 percentage points from 5.44 per cent on April 17th, when the Bank made its previous policy interest rate announcement.

The Bank will make its next scheduled rate announcement on July 17th, 2012

Artice from Canadian Real Estate Association, June 5th, 2012

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As was universally anticipated, the Bank of Canada opted to hold its target overnight rate at 1 per cent this morning. Ongoing uncertainty in the Euro-zone continues to weigh heavily on the Bank's outlook. In its statement accompanying the interest rate decision, it was noted that the bank is now projecting a contained Euro-crisis, but also a brief recession in the Euro-area due to ongoing deleveraging and fiscal austerity. The Bank also expects continued weakness, but no recession, in the United States through the first half of 2012 before a resumption of stronger growth. Given various challenges in the global economy, the Bank of Canada trimmed its outlook for Canadian economic growth to 2.1 per cent in 2011, 1.9 per cent in 2012 and 2.9 per cent in 2013 which is in line with our own forecast. On inflation, the Bank now expects slack in the economy to persist longer than originally forecast, leading to a closing of the output gap at the end of 2013. This implies softer than expected inflation in coming quarters, with consumer price growth moderating before returning to the Bank's 2 per cent target by the end of 2013.
Overall, this morning's statement shows a very cautious Bank of Canada that is unlikely to make any significant movements on interest rates over the next two to three quarters. Further monetary tightening will be highly contingent on a brighter growth outlook in the United States and a credible solution to the Euro sovereign debt crisis. Therefore we expect the Bank of Canada to remain on the sidelines through the end of 2011 and the first half of 2012.
Cameron Muir
BCREA, Chief Economist
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Canadian markets didn’t get much of a summer vacation this week, as negotiations on the Greek bailout package took centre stage globally, while the Bank of Canada’s interest rate decision was the main event at home. On balance, an agreement on a second Greece bailout, combined with some positive corporate earnings reports, improved market sentiment and helped equity markets rally. A more hawkish-than-expected statement from the Bank of Canada (BoC) added fuel, initially taking bond yields higher, and the Canadian dollar along with them. After a benign inflation report for June on Friday, however, these moves were partially unwound.

As expected, the BoC left interest rates unchanged, but the accompanying statement was more hawkish than anticipated. The Bank dropped the word “eventually” from the statement “some of the considerable monetary policy stimulus currently in place will be [eventually] withdrawn”, leading markets to move up their timetable on rate hikes. However, Wednesday’s Monetary Policy Report (MPR), included two technical boxes that emphasized the case for leaving rates lower for longer. One explained how interest rates can remain stimulative even after inflation has reached its target and the output gap is closed. This occurs if the economy is facing significant headwinds, such as a persistent reduction in foreign demand for exports. Governor Carney reiterated that monetary policy is not some mechanical process whereby you input expected inflation and the output gap, and out comes a rate decision (in fact if that were the case, he wouldn’t have a job). Rather, the Bank takes into account what he characterized as “the very real headwinds from the dollar, the U.S., from Europe”. This is likely in response to some critics who argue the bank is at risk of getting behind the curve on inflation.
The other technical box in the MPR underscored the damaging effects of a strong Canadian dollar on some sectors of the economy, expanding on the responses in last week’s Business Outlook Survey. Nearly half of firms surveyed reported adverse impacts from a stronger dollar, and these firms tended to be less optimistic about their future prospects. Adverse effects were more common among manufacturers, and firms based in Central or Eastern Canada. In sum, the survey showed that headwinds from a strong C$, and continued softness in U.S. demand are constraining sales prospects over the next 12 months for firms not benefitting from high commodity prices.
The Bank is clearly focused on the danger of hiking prematurely, and then having one of these risks worsen. It would be very difficult to raise rates before January, because in all probability they would want data on how Q3 evolved, and confirmation of firmer U.S. demand. Friday’s release of Canadian CPI and retail sales reports showed there is little urgency for the Bank to restart rate hikes. June inflation came in softer-than-expected, and retail sales were flat in real terms, confirming that there is little scope for retailers to raise prices with debt-fatigued consumers reining in spending. All told, our expectation for the Bank to delay resuming rate hikes until January remains in tact.
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The Canadian economy grew at the exceptional pace of 6.1% in the first quarter of 2010, propelled by a booming housing market, strong consumer spending and the rebuilding of private sector inventories. Moreover, growth in the second quarter of 2010, while not expected to register the sizzling pace of the previous six months, should be a robust 3%-4%.
However there are signs that the economy, if not stalling out, may be slowing down. April’s monthly GDP print was disappointingly flat as consumers moved to the sidelines, sending retail sales lower by almost 2%.
Even if Canadian consumers are beginning to tire out, economic growth should be supported in coming months by projects initiated under the federal government’s infrastructure stimulus plan. This stimulus will provide a needed boost to the economy through the remainder of 2010, with projected impacts peaking in the third quarter, but will create a drag on growth in 2011 as the stimulus is withdrawn from government expenditure.
The strength of the Canadian economic recovery over the past six months is evidenced by the over 300,000 jobs created in the Canadian economy since the beginning of the year. While this exceptional rate of job creation stands in stark contrast to the gloomy employment situation of our southern neighbour, it also re-affirms the need for the Bank of Canada to begin withdrawing its emergency level of monetary stimulus by raising interest rates, particularly given the proximity of core inflation to its 2% target rate.

The withdrawal of monetary and fiscal stimulus from the Canadian economy in coming months will result in slower growth in both the second half of 2010 and into 2011. This growth slowdown may be further exacerbated by weaker than currently anticipated US and global economic growth as well as a higher Canadian dollar resulting from a rise in Canadian interest rates relative to the United States.

In all, slower economic growth and inflation that is within the Bank of Canada’s comfort zone should mean that, while interest rates are certain to rise, the pace of interest rate increases should be orderly and the level of interest rates will remain near historic lows through the remainder of the year.
By Cameron Muir, Chief Economist and Brendon Ogmundson, Economist, British Columbia Real Estate Association
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