(OTTAWA, CNW Telbec) – 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. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent.

The global economic recovery is proceeding but is not yet self-sustaining. Greater emphasis on balance sheet repair by households, banks, and governments in a number of advanced economies is expected to temper the pace of global growth relative to the Bank’s outlook in its April Monetary Policy Report (MPR). While the policy response to the European sovereign debt crisis has reduced the risk of an adverse outcome and increased the prospect of sustainable long term growth, it is expected to slow the global recovery over the projection horizon. In the United States, private demand is picking up but remains uneven.

Economic activity in Canada is unfolding largely as expected, led by government and consumer spending. Housing activity is declining markedly from high levels, consistent with the Bank’s view that policy stimulus resulted in household expenditures being brought forward into late 2009 and early 2010. While employment growth has resumed, business investment appears to be held back by global uncertainties and has yet to recover from its sharp contraction during the recession.

The Bank expects the economic recovery in Canada to be more gradual than it had projected in its April MPR, with growth of 3.5 per cent in 2010, 2.9 per cent in 2011, and 2.2 per cent in 2012. This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada. The Bank anticipates that business investment and net exports will make a relatively larger contribution to growth.

Inflation in Canada has been broadly in line with the Bank’s April projection. While the Bank now expects the economy to return to full capacity at the end of 2011, two quarters later than had been anticipated in April, the underlying dynamics for inflation are little changed. Both total CPI and core inflation are expected to remain near 2 per cent throughout the projection period. The Bank will look through the transitory effects on inflation of changes to provincial indirect taxes.

Reflecting all of these factors, the Bank has decided to raise the target for the overnight rate to 3/4 per cent. This decision leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery.

Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

Information note:

A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 22 July 2010. The next scheduled date for announcing the overnight rate target is 8 September 2010.

By Courtney Tower 

OTTAWA (MNI) – Canada’s jobs strength Friday blew away all economists’ predictions but left them united in expecting an increase in the Bank of Canada’s policy rate next July 20, probably by 25 basis points.

“This strong report solidifies our call for the Bank of Canada to raise rates by 25 bps on July 20,” wrote analyst Benjamin Reitzes for BMO Nesbitt Burns shortly after Statistics Canada released its June employment report showing a surge of 93,200 jobs added in the month.

The June picture, the sixth consecutive month of jobs increases, “clearly shows that the Canadian recovery hasn’t stalled yet, despite signs of slowing momentum in the U.S. and other economies,” Reitzes wrote.

The June gains brought employment in Canada back to within only 15,000 of all the jobs lost since the labor market downturn began in the fall of 2008, and dropped the annual unemployment rate by 0.2% to 7.9%. This is the lowest rate since January of 2009, although it remains well above the 6.2% rate recorded in October, 2008.

The 93,000 new jobs in June surpassed analyst consensus predictions of a 20,000 gain in employment and the unemployment rate remaining at 8.1%. The new jobs were all in the services sector (+103,400) while goods industries lost 10,200 jobs, continuing the May loss of 7,700 and weak figures before that.

They were up 60,000 in the largest province, Ontario, perhaps in part reflecting the G-20 and G-8 meetings in Toronto and Huntsville, and +30,000 in the second largest province, Quebec. They were flat elsewhere and in actual decline in two of the four low-population Atlantic provinces.

“This recovery has continued to outpace the job market performance in the previous two major Canadian recessions by a large margin,” Diana Petramala at TD Economics said in a research note.

Petramala wrote what is a general opinion among economists, that the strong gains over the last three months probably reflect good economic growth over the last two quarters but that economic momentum is cooling off. She expects it to cool to a growth of 2.5% to 3.5% in the second half, “down from the 5-6% growth rates in the previous two quarters.”

However, Petramala adds, “employment recovery should continue in the coming months … at a more moderate pace of 15,000-25,000 new jobs per month.”

“The strong job trend and on-going decline in the unemployment rate argue for the Bank of Canada to move with its second rate hike of 25 basis points next week,” she said.

The jobs growth will support consumer spending “for some time,” wrote Gorica Djeric and Derk Holt, analysts at Scotia Capital Inc. The Bank of Canada must not have any choice “but to hike on July 20th with solid numbers like this,” they said.

However, the downside is that the Canadian economy remains functioning at low productivity, an economy “that remains biased to adding bodies versus getting more out of the already employed,” they added.

For Dawn Desjardins, assistant chief economist at Royal Bank of Canada, barring “another flare-up” in global financial markets, “we expect the Bank to gradually and steadily reduce the amount of policy accommodation.”

The Bank of Canada June 1 increased its rock-bottom 0.25% overnight rate target, where it had rested since April 2009, by 25 basis points to 0.50%. The BOC has indicated that more hikes are coming but has refused to indicate when and how soon, in light of the slow recovery elsewhere in the world and in Canada’s major market, the United States.

CBC News

The Bank of Canada repeated Thursday that the Canadian economy is growing “somewhat more rapidly” than it expected in January.

The central bank, in its quarterly Monetary Policy Report, said the economy grew at the fastest pace in a decade at the start of the year, but has started to slow down — with the housing sector taking the lead.

Still, it said, higher interest rates would be “appropriate.”

In a news conference after the report’s release, bank governor Mark Carney, in response to a journalist’s question, said that he saw a proposed bank tax as a “distraction” from what should be the core agenda of financial reform.

The International Monetary Fund has proposed that banks be taxed on their borrowing, with the proceeds set aside for a bailout fund in times of economic crisis.

The proposal is expected to be a hot topic when finance minister and central bankers from the Group of 20 economic powers meet beginning on Friday in Washington.

Canada’s finance minister, Jim Flaherty, has said he opposes the idea.

Carney said it would be better to focus on requiring banks to increase the amount of share capital underpinning their debt, constrain their borrowing and come up with better ways to prevent runs on investment banks. Those runs happen when lenders stop providing money to banks because of the fear of bankruptcy.

Carney also came out in favour of contingency capital, or requiring that banks convert some of their debt into shares in a crisis, in order to constrain reckless borrowing by holding out the fear of losses by shareholders.

GDP likely rose 5.8%
The bank said gross domestic product likely increased by 5.8 per cent in the first three months of this year, fuelled by government stimulus and robust consumer spending. That would be the fastest rate of growth since the fourth quarter of 1999.

As well, the withdrawal of government stimulus, the high Canadian dollar and continued low demand in the United States will further drag the economy.

The bank repeated is prediction for 3.7 per cent growth this year, and forecast growth of 3.1 per cent in 2011 and 1.9 per cent in 2012.

The assessment comes two days after it ended a pledge to keep its benchmark interest rate at a record low 0.25 per cent until July.

The bank also updated its assumption on the level of the Canadian dollar, saying it will average 99 cents US through 2011, an increase from its January assumption of 96 cents.

Read more: http://www.cbc.ca/money/story/2010/04/22/boc-monetary-policy.html?ref=rss#ixzz0lqsjnJSb

The Canadian Press

OTTAWA-The Bank of Canada has issued its first unequivocal warning that higher interest rates are on their way, likely in about five weeks.

The central bank’s policy statement Tuesday surprised no-one by keeping the trend-setting interest rate at the record low 0.25 per cent for another announcement date, but it was clear about where it was heading next.

The bank’s governing council declared with the economy growing faster this year than thought, as well as inflation, there was no need to stay with its “conditional commitment” that it wouldn’t touch rates until the end of the second quarter, or after June 30.

“This unconventional policy provided considerable additional stimulus during a period of very weak economic conditions,” the council wrote.

“With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus.”

Hence, the council went on, it was withdrawing the conditional commitment.

That means the bank no longer believes it has a pledge to keep the policy rate at the so-called lower bound until July and sets the stage for a quarter-point or even half-point hike on June 1, the next announcement date.

Markets had already been planning for the central bank to move off emergency rates and in the past few weeks had begun hiking fixed, longer-term mortgage rates.

Once the bank does act, short-term rates and variable mortgages are also likely to be increased.

To drive home the point that the bank believes the financial crisis is over, it said it was also ending its emergency liquidity instrument — the purchase and resale agreements — that ensured money markets in Canada continued to function during the recession.

Several economists had been urging governor Mark Carney to move early on interest rates, but the vast majority felt the bank would lose credibility if it did so without a clear indication that inflation was getting out of control.

A small minority, however, argued that the economy was still too weak to warrant any increase in interest rates this year, and that doing could stall the recovery.

Economists also feared that an early signal from the bank, ahead of the U.S. Federal Reserve, would light a fire under the loonie and make life even more difficult for Canada’s battered manufacturing and export sector.

The bank gave at most a mixed signal that it believes inflation is getting out of hand, however, it said it was more lively than it had expected.

Nor is the economy in danger of overheating, judging by the bank’s new forecasts for 2010, 2011 and 2012.

The bank said the economy will advance 3.7 per cent this year, 3.1 per cent next year and 1.9 per cent in 2012. In January, its last forecast, it had growth at 2.9 this year, 3.5 next and gave no estimate for 2012.

In essence, the bank has moved up growth in the near term but left it relatively unchanged in the aggregate.

“This profile reflects stronger near-term global growth, very strong housing activity in Canada, and the bank’s assessment that policy stimulus resulted in more expenditures being brought forward,” it said.

“At the same time, the persistent strength of the Canadian dollar, Canada’s poor relative productivity performance and the low absolute level of U.S. demand will continue to act as significant drags on economic activity,” it added.

As for inflation, the council said core prices have been firmer than projected, but that they were expected to ease slightly in the second quarter of this year and remain near the bank’s two per cent target over the next two years.

Total headline inflation, which includes volatile items such as gasoline prices, was expected to be higher than two per cent this year, but returning to target in the second half of 2011.

The sum of the parts, the bank said, is that the economy will return to full capacity one-quarter sooner than it had previously thought in the second quarter of 2011.

Paul Vieira, Financial Post

OTTAWA — The Bank of Canada reiterated on Tuesday its conditional pledge to keep its key-lending rate at a record low until July, but took a more hawkish view on inflation by indicating the risks to its outlook are “roughly balanced” as opposed to tilted to the downside.

That was the one significant change in its scheduled interest-rate announcement, and analysts might interpret this as a first step by the central bank to ready markets for an interest-rate hike.

“The Bank of Canada is now walking not crawling towards the exit,” said Kathy Lien, director of currency research at fx.360.com, following the release of the statement.

“Change is afoot. Evolutionary change, but change nonetheless,” added Stewart Hall, economist at HSBC Securities Canada.

Markets reacted accordingly, sending the Canadian dollar up sharply, over 80 basis points to US96.83 as of trading at 9:30 am ET.

For nearly a year, the central bank has pledged to keep its benchmark rate at 0.25% until July in an effort to pump up economic growth, on the condition that inflation would not hit its preferred 2% target until mid-2011. The central bank’s mandate is to set its key policy rate at a level to achieve 2% inflation.

In previous statements, the central bank had suggested inflation risks were titled downward because of the possible need to engage in quantitative easing, in which the Bank of Canada would flood financial markets with cash in an effort to spur lending and combat deflation.

But through the statement, the central bank might be indicating deflation is no longer a concern.

“The bank judges that the main macroeconomic risks to the inflation projection are roughly balanced,” it said, with upside risks being stronger-than-projected growth, while a protracted recovery and strong Canadian dollar flagged as downside risks.

Mr. Hall said this shift in nuance was “indicative of the need for a policy change at some point.”

The change in the inflation outlook emerged after Statistics Canada reported that the economy grew at a 5% annualized rate in the fourth quarter of last year – blowing past market expectations for a 4% gain and the central bank’s original 3.3% forecast. Economists say the fourth-quarter performance has set the stage for another robust gain, of perhaps 4% or more, for the first three months of 2010.

Recent data indicate that both the headline and core inflation rates have moved much closer to the 2% level than the central bank had expected. Under the bank’s forecast, the 2% level would not be reached until the third-quarter of next year.

“Core inflation has been slightly firmer than projected, the result of both transitory factors and the higher level of economic activity,” the central bank said in its one-page statement. “The outlook for inflation should continue to reflect the combined influences of stronger domestic demand, slowing wage growth, and overall excess [economic slack].”

In its economic outlook in January, the central bank said stubborn unit labour costs along with increases in property taxes and other administered prices accounted for the recent “stickiness” of core inflation.

The longer inflation stays “sticky,” analysts say, the more likely that the output gap, or the measure of excess economic capacity, is narrowing at a faster pace than previous central bank expectations.

The bank has said it anticipated the output gap to close in the third quarter of 2011. A large amount of excess production capacity suggests a lack of consumer demand, and gives producers little to no pricing power.

Meanwhile, the central bank also acknowledged that economic activity has been “slightly higher” than its own projections, with the 5% gain in the fourth quarter powered by “vigorous domestic demand” and a 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,” the bank statement said.

It added that “persistent strength” in the Canadian currency and the “low absolute level” of U.S. demand would continue to act as “significant drags” on economic activity.

“The Bank of Canada has walked a fine line with its latest decision, though overall it is undeniable that the risks to Canadian monetary policy are starting to tilt upwards,” said Eric Lascelles, chief economics and rates strategist at TD Securities. He added the firm’s view was that the central bank would not begin raising rates until the fourth quarter, “but it is hardly inconceivable that this could now come a touch sooner, in September or possibly even July.”

The central bank’s next statement on interest rates is April 20, and two days later it will release its updated economic forecast. Meanwhile, the governor, Mark Carney, has scheduled two speeches this month in which he may provide further guidance as to how the bank would behave as its conditional pledge comes to an end.

Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2631601#ixzz0h2iMiLfK
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By Courtney Tower

OTTAWA (MNI) – Financial markets looking for guidance likely will find little to move them, either up or down, in the Bank of Canadas policy rate announcement Tuesday.

It is a given among analysts that there will be no change to the central banks historically low 0.25% overnight rate, Tuesday (9:00 a.m. ET/1400 GMT) or in the subsequent rate announcement April 20.

There is no reason in Canada’s economic posture, with plenty of slack and low productivity, or in United States and world recovery (slow and disappointing) to persuade the Bank to alter its pledge to keep the fiscal stimulus at 0.25% through this years first half.

Most expect little change, either, in the short BOC policy statement about its reading of the future about the slack in the economy and reflecting little concern about inflation.

The numbers on are surprisingly strong, the core having reached the Bank’s 2.0% target in January. But this level is expected to be short-lived, said Diana Petramala of TD Economics. She wrote that the spike to 2.0% was largely due to “a base-year effect … prices fell significantly in January of 2009.”

“Looking forward, a persistent output gap will keep inflation under wraps for 2010, and the Bank of Canada will be able to keep its commitment on holding the rate through the first half,” Petramala wrote.

Analysts see little help for Canadian exports coming from U.S. demand, either, despite marked economic growth in the past three months. They see this spurt as temporary, based on restocking of inventories and driven by public stimulus programs rather than by a sustained private recovery.

All in all, writes Avery Shenfeld of CIBC Economics, “look for the Bank to wait even longer than promised, until early 2011, to pull the trigger on rate hikes.”

Shenfeld adds: “There is simply no need for the Bank of Canada to hurry up and tighten.”

He sees fiscal as well as monetary policy remaining stimulative all year, as repeatedly pledged by Finance Minister Jim Flaherty who brings down a new federal budget Thursday. For this year overall, despite encouraging GDP numbers in the early going, Shenfeld sees only “a half-speed, 2% recovery.”

Canadian GDP results for the fourth quarter of 2009, published by Statistics Canada Monday, will not influence immediate Bank of Canada thinking, analysts believe, although they might, if continued, cause rate hikes to begin later this year.

The economy expanded at a 5.0% annualized rate in the fourth quarter of 2009, faster than the 3.3% gain predicted by the Bank of Canada and stronger than most analyst expectations of a 4.2% to 4.5% increase.

The fourth quarter growth in GDP was the strongest since the third quarter of 2000, Statistics Canada said. It was broadly based, including a further increase in exports over imports, continued consumer spending and continued housing strength.

About the only negative aspect of the fourth quarter was that business investment in plant and equipment fell by 2.3% after rising by 1.6% in the third quarter. All major categories of business machinery and equipment investment declined.

A key argument for the Bank maintaining its 0.25% rate is that Canadian productivity is lagging quite seriously and the output gap is considerable. The falling business investment in plant and equipment supports that argument.

Nine university and private industry economists gathered together by the think tank C.D. Howe Institute unanimously call on the central bank to stand fast Tuesday. Eight of the nine would have it do the same in April. After that, they favor gradual rate hikes of 25 and 50 basis points.

These economists, like others surveyed, were concerned about “recent disappointing indicators in the United States and relative stagnation in Europe and Japan,” in contrast to continuing strong Canadian domestic indicators and strength in Asia.

The recent increase in the US Fed Discount Rate means very little in practical terms. The discount rate is the interest rate that the Fed charges banks for emergency loans and it is hardly being used. The rate hike however, signals the first step in a long journey towards removing liquidity from the system.

The move makes sense given that the Fed has closed many of its emergency lending facilities and demand for funding has slowed substantially. In fact, borrowing from this credit facility has totaled only $20 billion over the past three months. Given that normally the gap between the discount rate and the fed funds rate is 100 basis points and today, it is standing at 50 basis points suggests that we might see an additional increase in this rate in the near future. What counts, however, is the fed funds rate and this rate is unlikely to rise until early 2011.

As for the Bank of Canada, at this point it appears that the Bank is committed to start hiking come June or July. 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 recent move by the Ministry of Finance towards more stringent regulation of home loans is targeted to deal with potential problems down the road without derailing the housing market.

Finance Minister Jim Flaherty Tuesday announced tighter lending standards for mortgages, saying that while the housing market is “healthy” the moves are needed to “help prevent negative trends from developing.”

Under the new rules, all borrowers will need to meet standards for 5-year fixed-rate mortgages regardless of whether they’re seeking a loan with a lower rate and shorter term.

Also, the government is lowering the maximum amount Canadians can withdraw when refinancing to 90 per cent of the value of their homes, from the current 95 per cent, and requiring a 20 per cent down payment for government-backed mortgage insurance on “speculative” investment properties.

“There are no definitive signs of a housing bubble,” Mr. Flaherty said. “We think we’re being pro-active in the three steps we’re taking today.”

Frank Techar, the President of Personal and Commercial Banking for BMO Bank of Montreal, welcomed the announcement.

“While we do not believe that Canada faces a housing bubble, we fully support the minister’s actions,” Mr. Techar said in a statement. “Given the prospect of higher interest rates and the recent run-up in housing prices in some markets across Canada, the measures announced today are prudent. Currently, we require high ratio mortgages to be able to qualify using the 5 year rate.”

In a release, the finance department indicated that the three new changes to the mortgage insurance guarantee rules are intended to take effect April 19, 2010.

John Greenwood, Financial Post

The former head of the Bank of Canada has jumped into the debate over the housing market, warning that prices have reached a point where they are almost unsustainable.

“One would have to say that the relation of house prices to Canadians’ income is right at the high end of what one would think would likely be sustainable over time,” David Dodge told Business News Network on Wednesday.

Mr. Dodge, the central bank chief from 2001 to 2008 said the remedy is not necessarily higher interest rates. Rather, the Canada Mortgage and Housing Corp. should start scrutinizing more closely the kind of mortgages that it insures.

“That’s not to say the Bank [of Canada] ought to somehow raise interest rates really quickly, but it does say that [CMHC] should be very careful about the terms and conditions on which they are giving mortgage insurance,” he said.

As part of Ottawa’s policy to encourage home ownership among Canadians, the CMHC provides insurance for higher-risk home buyers such as those who are unable to make a 20% down payment, enabling people who would not otherwise be able to get a mortgage to enter the market.

The CMHC also guarantees billions of dollars of mortgages that are converted into Canada mortgage bonds and sold to investors.

Mr. Dodge said we’re “getting to a stage where one begins to get quite nervous” about the ability of some consumers to pay off their mortgages if rates rise. He notes that it is “clearly appropriate” to have very low interest rates because of the economic recovery and where rate stand in the rest of the world. He said that is why it’s more relevant to look at the “terms and conditions” of mortgages to deal with this issue.

The comments come less than a week after Jim Flaherty, the finance minister, said there is no compelling evidence of a housing bubble in Canada.

With residential real estate prices across the country close to record highs, many observers have expressed concern about the state of the market particularly with the run up that took place in the months since the financial crisis.

The concern is that when interest rates rise starting later this year many Canadians could find themselves struggling to make their payments. And if the economy reverses course at the same time — as some economists predict — the situation would be exacerbated, with serious negative implications for the housing market.

Moody’s warned last month that expanding consumer debt levels could leave Canada in a worse position than the United States in the next few years if current trends continue.

“We believe the housing market is the principal driver of this expansion,” said the report by Peter Routledge, senior vice-president at the rating agency. “We have the uneasy sense that we have seen this movie before…. As witnessed in the United States, this movie does not end well.”

Many blame the meltdown south of the border on the availability of cheap credit even to people with no chance of meeting their obligations.

While nothing in Canada compares to the subprime market in the United States, the CMHC mortgage insurance program enables lenders to offer cheaper mortgages to a wider range of borrowers.

At the same time, the CMHC’s mortgage bond progra — the underlying loans are also guaranteed by the agency — creates incentive for banks and other lenders to sell more mortgages by providing access to hundreds of billions of dollars of cheap funding.

Source: CBC News

The Bank of Canada has slightly raised its projection for growth in 2011, saying the Canadian economy will benefit from a faster-than-expected recovery in the U.S. this year.

The central bank said Thursday it expects the Canadian economy to grow by 3.5 per cent next year, up from its previous projection of 3.3 per cent.

But in late 2011 and into 2012, Carney said the country should get used to a lower growth rate.

“Once things settle down … growth is going to be more around two per cent as a run rate for the economy [rather] than the three per cent we have enjoyed earlier this decade or the last decade,” Carney told the CBC’s Amanda Lang. He cited disappointing productivity growth and demographic shifts as reasons for the lower growth.

The cental bank said GDP will grow by 3.5 per cent in the first quarter this year from Q4 of 2009. While that’s down from the 3.8 per cent quarter-over-quarter growth it was forecasting three months ago, the central bank now expects the economy to expand by 4.3 per cent in the second quarter and 4.0 per cent in the third quarter and 3.8 per cent in the final quarter of the year.

The Q2, Q3, and Q4 growth estimates are all increases from the central bank’s projections made last October.

“Export growth is projected to be somewhat stronger than was expected last October, owing to a more favourable outlook for the U.S. economy, particularly in the sectors that figure most importantly for Canadian exporters,” the bank said in its quarterly Monetary Policy Report.

The Bank of Canada substantially hiked its estimate for U.S. economic growth this year from 1.8 per cent to 2.5 per cent.

It says overall growth in Canada this year will come in at 2.9 per cent — down a tenth of a percentage point from its estimate of three months ago.

Still, the overall tone of the new outlook was slightly more upbeat than three months ago.

“Economic growth is expected to become more solidly entrenched over the projection period as self-sustaining growth in private demand takes hold.”

Canada fared better than most in downturn

The central bank says the Canadian economy shrank by 2.5 per cent in 2009. That’s larger than its previous estimate of 2.4 per cent.

But even though real GDP in Canada contracted for three consecutive quarters, “the magnitude of the downturn was more modest than in other major advanced economies.”

The central bank estimated that Canada’s GDP through the recession fell 3.3 per cent — less than most other advanced economies, even though Canadian exports plunged 20 per cent.

“Canada’s relatively solid economic performance, in spite of this trade shock, reflects the resilience of Canadian household demand. Consumer spending barely declined in Canada,” it said.

“Canada has suffered less than many other countries, partly because of its sound banking system and relatively strong household and corporate balance sheets, and also because of the speed and scale of monetary policy actions.”

Employment levels likely bottomed last summer, according to the central bank.

“The deterioration in the labour market appears to have stopped,” Bank of Canada governor Mark Carney told a news conference. But the bank noted that its recent surveys have found that “ongoing weakness in the labour market is nevertheless evident.”

The jobless rate is now hovering around 8.5 per cent.

Inflationary pressures edge higher

Inflationary pressures in Canada are building slowly. The central bank now expects total CPI inflation in the first quarter will be 1.6 per cent, up two-tenths of a percentage point from its estimate in October. It projects inflation will jump to 1.9 per cent by the fourth quarter of this year, up three-tenths of a point from its last projection.

Core inflation, which excludes the more volatile items in the consumer price index, has been “slightly higher” than expected recently, the bank said. “Nevertheless, considerable excess supply remains, and the bank judges that the economy was operating about 3.25 per cent below its production capacity in the fourth quarter of 2009,” it said.

The outlook for global economic growth this year and next is “somewhat stronger” than it was in October, the bank added. But it warned that “the recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems.”

On Tuesday, the Bank of Canada left its key lending rate at a rock-bottom 0.25 per cent and reaffirmed its commitment to keep it at that level through June, assuming inflation does not become a concern.

OTTAWA – Julian Beltrame, The Canadian Press

It will be another year before the Canadian economy can stand on its own feet without government assistance, the Bank of Canada said Tuesday.

The slightly pessimistic assessment came as the central bank signalled in no uncertain terms that it was in no hurry to move off historically low interests rates, saying they are still needed to stimulate borrowing and business expansion.

And it revised downward – ever so slightly – its previous forecasts on growth for this year while raising it slightly for next year.

The key message governor Mark Carney sought to impart was that both the Canadian and global economies may be improving, but that they are still primarily being propped up by massive government spending, and historically low interest rates, along with other measures.

“While the outlook for global growth through 2010 and 2011 is somewhat stronger than the bank had projected (in October), the recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems,” Carney and his policy-making council said.

As for the Canadian economy, the council noted that the economy is operating 3.5 per cent under capacity and that the private sector won’t likely become the “sole driver” of demand growth until 2011.

With that in mind, the bank kept its trendsetting overnight interest rate at 0.25 per cent, the lowest in history, and again pledged to keep it there for the next six months.

To reinforce the commitment, it extended its emergency lending instruments to April, allowing chartered banks to access funds at the historically low rate.

The discouraging language on interest rate hikes sent the Canadian dollar below 97 cents for most of the trading day, from its 97.42 cents US closing Monday. It finished down 0.40 of a cent Tuesday at 97.02 cents US.

In that regard, mission accomplished, said independent economist Dale Orr.

One of the key challenges facing Carney in the next several months, Orr said, is to discourage markets from thinking he will hike interests rates ahead of the U.S. Federal Reserve. That would strengthen the loonie and weaken the recovery by discouraging exports.

Overall, the bank’s view on the economy remains little changed since October, when it last issued an outlook, and is falling in line with many other forecasters.

On Tuesday, the Conference Board of Canada issued its latest projection, pegging growth at 2.8 per cent this year.

The Bank of Canada’s estimate of growth is a tick higher at 2.9 per cent, which is still above the consensus estimate of 2.6 per cent. It expects the economy will expand by 3.5 per cent in 2011, also above many other forecasts.

Tuesday brought an indication that the economy is starting to revive after almost a year of contraction and job losses.

Statistics Canada said its leading index for December rose by 1.5 per cent, the biggest one-month advance since 1958, with none of the 10 major components registering losses.

Despite what several commentators called the “dovish” nature of the central bank’s remarks, some analysts saw elements of optimism in the statement.

Scotiabank economist Derek Holt noted that central bank removed from its text an earlier comment that “significant fragilities remain,” and forecast that global expansion would be somewhat stronger in 2010 and 2011 than it thought three months ago.

Economists are now projecting that Canada’s gross domestic product grew by between three and four per cent in the last three months of 2009, and will likely advance at a similar pace this winter.

“The justification for giving away free money is a lot tougher now,” Holt said, even if growth is muted.

However, Carney reiterated his concern about the low demand for Canadian exports – particularly in the U.S. – and the high price manufacturers are paying for the continuing strong loonie.

“The persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags on economy activity in Canada,” the bank statement said.

The bank was given some backing on the point by a TD Bank report, also released Tuesday.

The assessment called for manufacturing output to outperform most other sectors over the next few years. But output still won’t get it back to where it was a decade ago because of how far it has fallen in the recession.

Especially noticeable will be the drop-off in auto sales and production, said economist Dina Cover.

In another aspect of the Bank of Canada statement, the central bank said inflation has been rising faster than anticipated but it did not appear to be overly concerned at this point.

The bank said it still doesn’t believe inflation will return to the two per cent target until the third quarter of 2011, another indication it is not in a hurry to raise interest rates.

Cautious optimism is on the lips of many Real Estate agents and economists. Though the last 12-18 months has definitely held some uncertainty in the housing market the future is looking much brighter for the Ontario home market.

Canada and Ontario appears to have avoided any lasting impact from the collapse of the US housing market and the subprime mortgage market meltdown. What we have seen over the past 18 months was fear versus demand and fair market values relative to the true economic environment in Ontario. From the price stability I have seen, I would say we are on great footing.

Here is my rational for Ontario home price appreciation for 2010.

Ontario home prices are fairly valued. Despite a healthy appreciation in home prices in Ontario between 2001-2009 we have avoided the huge run ups (and drops) in prices seen in Alberta and British Columbia.

Ontario’s housing supply appears to be inline or undersupplied versus the demand.

The 40 billion dollar economic stimulus package Canada has added to its current 507 billion dollar national debt represents approximately 8.5% in new debt. While this is bad news for most tax payers, borrowing to this degree will definitely cause price inflation. This will directly and positively affect the value of real estate.

The world economy appears to be stable or growing. Despite a US collapse, China’s GDP growth rate for 2009 is estimated to be around 8.2% and is forecasted to be in the 8%-9% range for 2010. India grew at a rate of 7.9% over 2009 and expects a 7% growth rate in 2010. Since Canada benefits directly from rising demand of natural resources, if the demand continues, this will be sure to have a further positive impact on the Canadian economy.

The unemployment rate in Ontario rose sharply as a result of the US economic collapse however has since started to slowly decline. The unemployment rate currently sits around 8.5%, it averaged around 6.2% during the 36 months of 2006-2008.

Slowly improving consumer confidence and record low interest rates are bound to have a positive impact on the spring 2010 housing market. The spring housing market may even be exaggerated by the fact that the Bank of Canada has signaled their intention to raise interest rates in June and the introduction of the HST on new home purchases in July.

Where prices go beyond the summer of 2010 will really depend on how much and how quickly the bank of Canada intends on raising rates.