2.5% bank rate by 2011: economist

Date: Friday, October 9th, 2009

Source: CBC News

The Bank of Canada will push its benchmark interest rate to 2.5 per cent in the next year and a half, an economist with the Central 1 Credit Union predicted Friday.

Central 1 Credit Union is the umbrella organization for the credit union systems in British Columbia and Ontario.

The central bank rate is now at 0.25 per cent and the bank has said it will likely stay there until the spring of 2010. Helmut Pastrick, chief economist with Central 1, told CBC News the recovery remains on track, with only occasional data suggesting a setback.

He looked at gains in U.S. housing, manufacturing and government stimulus and predicted the next report on U.S. gross domestic product will show the American economy started growing again this fall, perhaps by as much as four per cent, for the first time in more than a year.

“The general direction of the North American economy is on an improving trend,” Pastrick said. “We can certainly expect industrial production in the U.S. and in Canada to continue to increase in September and October.

“Certainly the Cash for Clunkers program has had a substantial impact, albeit temporary, on car sales but manufacturers now will be in the process of rebuilding their production to help restock new-car dealer inventories.”

Pastrick’s prediction came one day after the chair of the U.S. Federal Reserve, Ben Bernanke, said again he was in no hurry to start increasing interest rates. He expected the rate would stay at present levels for an “extended period,” Bernanke said in a speech in Washington.

The Canadian dollar rose after those remarks, to close up .71 of a cent at 95.75 cents US Friday.

Australia’s central bank surprised everyone on Oct. 10 when it became the first G20 country to raise rates.

Much of the growth will have been the result of government stimulus, especially low interest rates, Pastrick admitted but predicted the private sector would jump in with increased investment and job creation.

“Over time, the private sector begins to take the main role in economic growth and that should play out this time as well. However, it appears that it’ll be more of a longer drawn process, particularly in the U.S. since there’s still some ongoing problems in credit markets,” he said.

Bank of Canada anxious about low rates

Once the recovery is underway, he said, the central bank will be anxious to move away from rates near zero. Pastrick predicted the bank will likely raise rates by half a percentage point at a time perhaps three times through the fall-to-spring period from 2010 to 2011.

“That would allow them some room to cut rates at some future point should the economic recovery falter.”

One wild card would be the sudden rise in the Canadian dollar against the U.S. currency.

“Should the dollar continue to appreciate further, then growth would be restrained and the Bank of Canada’s first move, or move towards rate normalization, would be delayed, he said. “It may not occur perhaps until sometime in 2011.”

Lawrence Kobescak

Lawrence Kobescak

Lawrence Kobescak, the creator behind OntarioMortgageSuperstore.com is a real estate sales representative, mortgage agent and real estate investor. OntarioMortgageSuperstore.com has reached over 240,000 Canadians since 2009. Lawrence has been quoted in the Globe & Mail and MortgageBrokerNews.ca.

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