Date: April 12th, 2011
(CBC News)

The Bank of Canada kept its benchmark lending rate unchanged at one per cent in its latest decision on Tuesday.

Since raising its overnight lending rate to one per cent in September, the bank has held steady for five consecutive policy decisions.

Economists had expected the central bank to hold rates steady, citing the fact that inflation still appears to be under control in Canada.

“We judge that the BoC will want to monitor core CPI for signs of ‘consistency’ for at least a couple months more,” Michael Gregory, senior economist at BMO Capital Markets Economics, said in a report a week ago.

For its part, the Bank of Canada said economic growth in the United States appears to be picking up steam, while emerging markets continue to expand at a robust pace.

But the recent Japanese earthquake will cause supply disruptions, the monetary authority said.

In addition, while Canada’s gross domestic product growth is better than anticipated, the expansion is not setting off inflationary alarm bells, the bank said.

Canada steady, Europe not so

The bank’s decision comes in the face of an interest rate hike in Europe. Earlier in April, the European Central Bank raised its trend-setting rate by one-quarter of one percentage point to 1.25 per cent.

Historically, European monetary authorities have been much quicker to clamp down on economic growth to ease inflationary pressures than either Canada or the United States.

Most central banks have begun worrying that soaring commodity prices, including for foodstuffs, and gathering strength among the world’s major economies could reignite a general round of price hikes in industrialized countries.

But, as of yet, the U.S. Federal Reserve is still taking a “wait-and-see” approach before hiking U.S. rates.

“Most Fed members have made it clear that rising commodity prices are not [the] result of U.S. monetary policy nor does it require a policy response,” noted Camilla Sutton, chief currency strategist at Scotia Capital in a Tuesday note.

The Bank of Canada kept its benchmark lending rate unchanged at one per cent in its latest policy decision on Tuesday.

Since raising its overnight lending rate to one per cent in September, the bank has held steady for four consecutive policy decisions.

But while the bank kept the rate steady, its statement took a cautious tone with regards to future rate hikes. “Any further reduction in monetary policy stimulus would need to be carefully considered,” the bank said.

That’s a slight change from some previous statements.

In recent months, Bank of Canada governor Mark Carney has repeatedly warned Canadians to get their financial houses in order, noting that interest rates will rise at some point.

“While consumption growth remains strong, there are signs that household spending is moving more in line with the growth in household incomes,” the statement read.

But the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance remain a concern, the bank said.

The Canadian dollar was slightly lower, as investors had anticipated the move. The loonie was 0.16 of a cent US higher to 103.1 cents before the news, and fell to 102.8 in the moments following.

The bank’s next policy decision is due April 13.

Research released by the Bank of Canada Thursday, not surprisingly suggests that Canada’s largest banks are slow to pass on cuts in the Bank of Canada’s policy interest rate.

“Canadian lenders appear to be extremely slow to pass on changes in the Bank Rate to their customers,” author Jason Allen wrote in the report entitled “Competition in the Canadian Mortgage Market.”

Researchers found that “in the short run, five of the six largest Canadian banks adjust their rates upward more quickly when there are upward cost pressures than downward when costs fall,” he said.

Having market power in Canada, “there is scope for banks to coordinate implicitly or explicitly,” Allen wrote.

If costs rise they all want to increase their prices, but if costs fall they wait before reducing rates “because all the banks can earn higher profits.”

Vince Gaetano is not surprised by the report, calling the banks’ practice of holding off discounting for longer periods “common practice.”

He said banks usually lenders hold off until after the end of the month before passing on lower rates because this is when renewal notices for maturing mortgages are printed and issued in advance of the maturity date.

“Renewal notices with a higher rate printed on them provide the illusion of a potentially bigger discount that can be offered to the client – a client who most times does not want to put in the effort in the mortgage transfer process.”

Dave Larock, a broker with Integrate Mortgage Planners-TMG in Toronto said there is another group affected – borrowers who are just about to close their mortgage transaction. “Since most rate drop policies are in effect until seven days prior to closing, it is this group that misses the savings if rate drops are delayed,” he said. “From a lender’s perspective, this group is not very rate sensitive because they are so close to their funding date that switching lenders is usually not feasible, while mortgage applicants who are earlier in the process will eventually receive the lower rate through any standard rate-drop policy, provided that the rate decrease is sustained.”

The research also indicated that borrowers who use a mortgage broker pay less, on average, than borrowers who negotiate with lenders directly. This average discount is about an additional 19 basis points.

“The conclusions of the report are very reasonable,” said Jim Murphy, president and CEO of CAAMP. “They coincide with our own research at CAAMP on discounts. Mortgage brokers play a key role in offering choice to borrowers when making their most important financial decision.”

Larock said he agrees with the paper’s overall premise that more lending competition leads to better rates and choice for consumers and that in today’s market banks can coordinate implicitly or explicitly. “That’s just the nature of an oligopoly,” he said. “If Canada’s big banks were allowed to merge they would increase their market muscle at the customer’s expense. We need more lenders, not fewer.”

The report stated that Canada’s mortgage market represents “almost 40 per cent of total outstanding private sector credit, BOC researchers said in the quarterly Financial System Review.” It is dominated by the nation’s six major national banks plus a large credit union, the Desjardins Movement, and the Alberta province-owned ATB Financial.

The “Big Eight” controls 90 per cent of the assets in the banking industry. All offer the same types of mortgage assets, the great bulk of these being guaranteed by the federal government’s Canada Mortgage and Housing Corporation.

“The Canadian mortgage market is relatively simple and conservative, particularly when compared with its U.S. counterpart,” the report stated. “Many Canadians sign five-year, fixed-rate contracts for the life of the mortgage — typically 25 years.”

Bruno Valko, director, national sales for Resmor Trust said there is an advantage because the mortgage broker marketplace is not dominated by a few big players.

“In the broker/wholesale channel, there’s more competition and lenders will move quicker to lower rates and attract business when the opportunity presents itself,” he said. “Furthermore, the scale of product offerings is greater, so in the event a person doesn’t qualify at the Big Eight, a broker can potentially offer solutions.

“And if we agree that the broker/wholesale channel moves quicker to lower rates when the opportunity presents itself, that’s another advantage for consumers to choose mortgage brokers.”

By Courtney Tower

OTTAWA (MNI) – Canada’s inflation picture, although it rose to 2.4% on an annual basis in September from November 2.0% rate which the Bank of Canada targets as most favorable, is expected to remain subdued in its key parts and not persuade the central bank to raise its policy rates very soon.

The Statistics Canada report on December inflation was followed by a drop of half a cent in the Canadian dollar up to just before noon Tuesday, down .50 cents to 100.090 to the United States dollar.

Inflation in Canada ended the year at 2.4%, where it had been in October, up from the 2.0% recorded in November. Energy prices led the rise, and food prices were up, but excluding these two inflationary pressures were mild in December. Prices overall rose very modestly, to an annual increase of 1.6% in December from 1.5% in November. Price pressures remained modest among most major parts of the Consumer Price Index basket of goods.

Core inflation, which the Bank of Canada relies on as a key factor in setting its policy overnight rate and in which volatile elements such as food and energy are stripped out, rose 1.5% in December from the levels of December a year ago, up from 1.4% in November. It remains well below the Bank’s 2.0% target.

“Today’s soft inflation report suggests there is little urgency for the Bank of Canada to lift the overnight rate from its current low level of 1.0%,” economist Diana Petramala of TD Economics wrote to clients.

Petramala sees energy prices abating in coming months with crude oil prices staying flat, the Canadian housing market cooling, consumer spending being moderate, and the Canadian dollar above par with the U.S. dollar. All of that, she believes, will keep inflation in check and not hitting the 2.0% target until mid 2012. As a result, she wrote, the Bank of Canada would not likely begin to raise its key rate until July.

The Royal Bank of Canada takes a similar view of the prospects for muted inflation in Canada but projects that the slow pace of economic growth in Canada of the last half of 2010 will pick up at a faster pace than the Bank of Canada predicts.

Dawn Desjardin, assistant chief economist, says that the faster pace of recovery this year will impel the Bank to resume rate hikes, in the second quarter this year. She notes that the market has priced in the first 25-basis point increase for the third quarter of 2011 but says that the RBC believes it will come earlier.

The Bank kept the overnight rate at 1.0% on January 18, for the third successive hold at its fixed date announcements, saying that any increase in the rate “would need to be carefully considered.” It’s next announcement dates are March 1 and April 12.

** Market News International Ottawa **

By Courtney Tower

OTTAWA (MNI) – The Bank of Canada held its policy interest rate at 1.0% Tuesday, as expected, and continued to caution against expecting new rate increases in the future.

The Bank in its fixed-date announcement maintained the 1.0% overnight rate, set last October after three successive 0.25% rate hikes from the year-long rock-bottom rate of 0.25%.

The Bank was slightly more positive about United States, European, global and Canadian economic performances than it had been in its monetary policy report last October, but just slightly.

Global economic recovery is moving ahead “somewhat faster” than the Bank had anticipated, but risks “remain elevated,” the Bank said in a brief statement giving the stand pat decision.

Private demand has picked up in the United States and will be reinforced by the new stimulus package reached by President Barack Obama and Congress, it said. European growth has been slightly stronger than expected, but will be restrained by sovereign debt and deficit concerns.

Some overheated emerging markets are tightening policy measures, which may reduce the demand for and prices of commodities, the Bank said. Commodities have been a strong factor in Canada’s export performance.

The Bank listed a string of long-known Canadian economic factors behind the present modest growth. These include: government stimulus spending winding down this year and “stretched household balance sheets” restraining consumer spending and residential investment. On the other hand, business investment “will likely continue to rebound strongly,” and better U.S. growth and global demand for commodities will help net exports.

Net exports, however, are being held back by the persistently high Canadian dollar and “Canada’s poor relative productivity performance.”

Given all this, the BOC said, the Canadian economy will grow by 2.4% in 2011 and 2.8% in 2012, a very slight increase on the 2.3% in 2011 and 2.6% in 2012 that the Bank had predicted in October.

Inflation will continue to be of little concern, with inflation pressures remaining “subdued,” the Bank said.

Overall, then, the Bank decided to leave “considerable monetary stimulus in place,” at the 1.0% rate, and to believe that inflation will remain well anchored because of the “significant excess supply” remaining.

And the Bank repeated the caution it has now extended since October: “Any further reduction in monetary policy stimulus would need to be carefully considered.”

The next scheduled Bank of Canada meeting is March 1st 2011

Federal Finance Minister Jim Flaherty announced tighter mortgage rules on Monday to address concerns over high Canadian household debt.

“In 2008 and again in 2010, our government acted to protect and strengthen the Canadian housing market,” Flaherty told a news conference in Ottawa. “We continue to do so today.”

Flaherty unveiled three main changes:

•The maximum amortization period for a government-insured mortgage was lowered from 35 to 30 years.
•The upper limit that Canadians can borrow against their home equity was lowered from 90 per cent to 85 per cent.
•Government insurance backing on home equity lines of credit, or HELOCs, has been removed.
The first change is likely to have the largest impact. Buyers who purchase a home with a down payment less than 20 per cent of the value of the home are required to purchase government-backed mortgage insurance through Canada Mortgage and Housing Corporation.

Under the new rules, mortgages amortized over longer than 30 years will no longer qualify for that insurance, making it effectively impossible to get a highly leveraged mortgage of more than 30 years in Canada.

After companies began insuring mortgages of 40 years or more, Ottawa set the limit at 35 years in 2008 before Monday’s move lowered it to 30.

Aims to stem tide on consumer debt
“This measure will significantly reduce the total interest payments for Canadian homeowners,” Flaherty said.

He was referring to the fact that anyone taking a longer amortization on a mortgage would pay much more in interest over time.

Under current rules, a five per cent, $300,000 mortgage with a 35-year amortization would have a monthly cost of $1,514. When the new rules come in on March 18, a similar 30-year mortgage at five per cent will have a monthly payment of $1,610 — a $96 difference per month, but over the life of the mortgage, that adds up to $56,139 in savings.

Flaherty pitched the lowering of the amount that can be borrowed against home equity to 85 per cent as a move to ensure Canadians retain more equity in their homes.

“This will promote saving through home ownership and limit repackaging consumer debt into mortgages,” he said.

The final change, to remove government insurance on HELOCs, came as a result of Ottawa’s concern that certain financial institutions were allowing homeowners to roll too many consumer purchases into CMHC-insured mortgages.

“I think that’s particularly risky because some of those loans are not used to create housing. They’re used to buys boats, and cars and big-screen televisions,” Flaherty said. “That’s not the business that home insurance was designed for.”

While Flaherty called the changes “moderate,” they did not include an increase to the five per cent minimum down payment Ottawa requires for a home purchase. They also stopped short of a proposal that surfaced last week that would have required 100 per cent of condo fees to be included in the list of expenses that are measured against income when financial firms consider a mortgage candidate. Currently, only 50 per cent must be included.

Watchers reacted largely positively to the news.

“The speculation had been that tighter mortgage insurance rules would be included in the upcoming federal budget,” BMO economist Michael Gregory noted.

But with speculation that the budget might trigger an election, the Conservative government clearly thought the issue was important enough to bring forward before a budget document that might never get passed, Gregory said.

“For the new homebuyer, the reduced amortization is a significant change that should soften the demand for homes/mortgages below what they otherwise would have been.”

The head of the Canadian Association of Accredited Mortgage Professionals said the changes should help to increase equity in homes and ease fears about growing consumer debt levels.

But Jim Murphy said his association had suggested that Ottawa tighten qualification standards for 35-year mortgages, rather than abolishing them altogether.

Still, he is happy the government did not raise minimum down payment levels, which he said could have stalled the housing market. Murphy said the rule changes will likely spark a rush of buyers into the housing market before March and will pull more sales into the first part of the year.

The changes also come following recent warnings from the Bank of Canada on household debt levels.

In December, bank governor Mark Carney cautioned Canadian households and businesses not to be lulled by current low interest rates, because repercussions from a hike could be swift.

Rates ‘will rise’
“While rates are low by historical standards, they eventually will rise,” Flaherty said Monday. He dismissed the notion that the announcement was timed to precede the bank’s next decision on interest rates, which are set to be revealed Tuesday.

“The particular timing today is not related to the interest rate announcement,” Flaherty said. “The governor and I speak regularly, and we discuss these types of issues [and] we make an effort to make sure government policy complements the Bank of Canada’s monetary policy.”

Last week, Agathe Côté, a deputy governor at the bank, told a Kingston, Ont., audience that a sudden weakening in the Canadian housing sector could affect other areas of the economy given the high debt loads of some households.

If that shock hits, Canadians would be expected to cut back on their spending, she said.

Flaherty’s announcement is the second time in three years that the government has clamped down on mortgage rules. In 2008, the government brought in several alterations, including:

•Cutting the maximum amortization period to 35 years from 40.
•Requiring a minimum down payment of five per cent.
•Establishing a requirement for a consistent minimum credit score.
•Introducing new loan-documentation standards.

The Bank of Canada 2011 schedule of dates for its policy interest rate announcements.

The announcement dates from December 2010 through December 2011 are:

Tuesday, 7 December 2010
Tuesday, 18 January 2011
Tuesday, 1 March 2011
Tuesday, 12 April 2011
Tuesday, 31 May 2011
Tuesday, 19 July 2011
Wednesday, 7 September 2011
Tuesday, 25 October 2011
Tuesday, 6 December 2011

All announcements will continue to be made at 09:00 (ET).