By Courtney Tower

OTTAWA (MNI) – The Bank of Canada held its policy rate at 1.0% Tuesday for its 7th setting but signalled some cautious revision in its previous position that such stimulus to the economy would only be eventually withdrawn.

The central bank maintained the pause it began last October, after three 25 basis point increases from its year-long rock-bottom 0.25% rate.

The BOC did say, as it has for several settings, that further reduction in stimulus “would need to be carefully considered.” But it removed the word “eventually” from the previous statements and said:

“To the extent that the (Canadian) expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn, consistent with achieving the 2 per cent inflation target.”

The Bank in its statement described Canada’s economic picture in relatively positive terms, with dangers coming from overall global inflationary pressures and a weak United States economy making Canadian net exports slow.

United States growth has been slower than the Bank had expected in its policy study last April and growth in “core Europe” a little stronger, the statement said. Japan would operate “below previous expectations.” Emerging markets, especially China, are seen continuing “very strong” growth.

That emerging market growth, demanding the world’s commodities, will keep resources prices “at elevated levels” following recent declines, the BOC said. And these prices, along with “persistent excess demand” in the same emerging market countries, are contributing to global inflation pressures.

The Bank also cites the European sovereign debt scene as another contributor to risk aversion and volatility in financial markets. Indeed, the BOC bases its whole projection for Canadian and global economic conditions on the assumption that the ongoing Europe sovereign debt crisis will be contained. However, it said, “there are clear risks around this outcome.”

Canadian growth has been slightly slower than the Bank had expected in April, it said. But it expects growth to “re-accelerate” in the second half of this year.

“Household spending remains solid and business investment robust,” the statement said. Net exports remain weak, because of weak U.S. demand and the high Canadian dollar. Financial conditions in Canada “remain very stimulative and private credit growth is strong.”

The Bank sees business investment remaining strong, net exports improving over time, household spending to drop back more in line with disposable income. It sees Canadian GDP growing by 2.8% in 2011, rather than the 2.9% it had expected in April, and by 2.6% in 2012 and 2.1% in 2013 — the two latter as previously expected.

The next dates for announcing the overnight target are September 7 and October 12.

By Courtney Tower

OTTAWA (MNI) – The Bank of Canada continued to hold its policy interest rate at 1.0% Tuesday, as expected, although it’s reading of the Canadian, global and U.S. economies was far more positive than before.

The Bank in its scheduled announcement maintained the 1.0% target for the overnight rate for the fifth consecutive setting, and for the fifth time it cautioned: “Any further reduction in monetary policy would need to be carefully considered.”

Apart from continuing to give no hint of future rate hikes as the economy improves and inflationary pressures might build, the Bank in its brief statement gave a picture of a strengthening Canadian economy, global recovery “expected to continue at a steady pace,” and United States growth that is “solidifying.”

The BOC will expand upon its analysis of the Canadian and global economic outlooks Wednesday in a quarterly Monetary Policy Report, but the more bare-bones sketch on Tuesday is the most generally positive in many months.

The BOC admitted that its January projection of Canadian growth at 2.4% for 2011 has been well outstripped, and now projects it at 2.9% at an annual rate. It sees 2.6% growth for Canada in 2012.

And further, the Bank now sees the output gap reduced to zero, with the economy operating at full capacity, by mid-2012 instead of by the end of 2012 as it had earlier expected.

For Canada, the Bank said activity is “rebalancing toward business investment and net exports, and away from government and household expenditures.” It expects business investment to “rise rapidly.” Net exports, however, will be constrained “by ongoing competitiveness challenges” — BOC-speak for a poor productivity record. These chalenges are “reinforced by the recent strength of the Canadian dollar.”

Underlying inflation in Canada remains “subdued,” the Bank said, but temporary factors will boost total or headline inflation to a high 3% in the current second quarter, before it goes back to the 2% target by mid-2012. Core inflation, on which the Bank fixes for its policy (lately running at a very low 0.9%) will rise gradually to 2%.

Core inflation will perform as the Bank expects, “as excess supply in the economy is slowly absorbed, labor compensation stays modest, productivity recovers, and inflation expectations remain well-anchored.”

The Bank sees global economic recovery in Europe as “becoming more firmly entrenched.” U.S. growth will continue, although limited by consolidation of household and, ultimately, government balance sheets. Global inflationary pressures will rise and global financial conditions “remain very stimulative.”

** Market News International Ottawa **

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.”