Greek crisis 'serious,' could imperil Canadian economy, says BoC's Carney

By Julian Beltrame, The Canadian Press

OTTAWA - Bank of Canada governor Mark Carney is warning G20 countries to come to terms with the full implications of the Greek crisis and debt overhangs in other countries, or risk a setback to the global economic recovery.

Canada's top banker told a Senate committee Thursday that he does not believe the problems emerging in Greece and other southern European countries will lead to a second recession, but they could hamper the recovery.

If markets respond to Greece's appetite for debt by making borrowing more expensive overall, Carney says there will be an impact on Canada's growth.

"The situation is serious," he said, adding that if appropriate steps are not taken "one can expect an increase in longer-term interest rates on a global level."

"Canada's fiscal position is among the best, (so) we will do better than others, but we will be pulled up by the rise in global interest rates, and that will have a knock-on effect on investment and growth in this country."

In Gatineau, Que., Prime Minister Stephen Harper also highlighted the Greek situation at a gathering of representatives of G20 business groups, saying the debt crisis in Athens serves as an object lesson to other governments.

"The Greek crisis reminds us that government borrowing and government debts cannot go on without limit," Harper said.

Canada plays host this summer to both the G8 and G20 summits, a gathering of leaders from the world's biggest economies.

Carney, recently ranked No. 21 on a list of most influential world leaders by Time magazine, told the Senate committee that he has been in contact with European officials and is encouraged that there will be a solution to the Greek crisis.

European and German officials assured markets Thursday they were working quickly on approving a bailout for Greece as they try to keep the country's debt crisis from dragging others into a continent-wide financial meltdown.

But Carney said the problem extends beyond Greece, a view echoed in a TD Bank report released later in the day that names France, Germany and the United Kingdom, along with the so-called PIIGS countries (Portugal, Ireland, Italy, Greece and Spain).

All are approaching or have already surpassed debt burdens of more than 100 per cent of gross domestic product. Canada's debt burden, by comparison, is expected to peak at around 35 per cent.

"There is no guarantee that this will be sufficient to reassure investors regarding the outlook for the other debt-beleaguered euro members," TD's economists said of the Greek rescue efforts.

Even if Europe passes that immediate test, severe austerity measures — such as higher taxes and reduced spending on pensions and health care — will be necessary to stop the budgets of other countries from imploding, they argue.

"That's the risk," adds BMO deputy chief economist, Douglas Porter. "You will have a lot of governments forced to take some pretty severe medicine and it takes a lot of the wind out of the world economy's sails."

Carney says the industrialized countries can't do it alone and calls the upcoming June G20 meeting in Toronto critical because of the need to bring emerging economies, such as China, on side.

He said the industrialized countries must make clear to China and other emerging economies that the system cannot function unless they adjust their currencies and play a bigger role in supporting global demand.

The United States, Canada and others have long complained that Asian states have kept their currencies low to boost exports at the expense of other industrial economies, mostly in North America and Europe.

"What's required is countervailing policies that are in the interests of other countries to expand domestic demand, particularly in emerging markets, to enhance flexibility in exchange rates and obviously keep the global financial system and trading system open," Carney said.

Carney also stressed the importance to the recovery of the G20 adopting measures to reform the international banking system, which is regarded as a key contributor to the 2008-09 recession.

While Canada's banks held up well under the stress, Carney said new rules that will require financial institutions to hold more capital reserves to discourage risk-taking will likely also impact Canada's banks.

"There are some merits to thinking about further strengthening of the capital regime in this country as well," Carney said.

http://ca.news.finance.yahoo.com/s/29042010/2/biz-finance-greek-crisis-serious-imperil-canadian-economy-says-boc.html

Carney Testimony May Play Down Chance of June Rate Increase

Carney Testimony May Play Down Chance of June Rate Increase

April 29, 2010, 12:34 AM EDT

By Greg Quinn

April 29 (Bloomberg) -- Bank of Canada Governor Mark Carney may damp investor expectations he will raise his policy interest rate in June during parliamentary testimony today, through a change in language from last week’s interest rate announcement.

Carney shifted his wording about the prospects for rate increases in testimony to the House of Commons Finance Committee April 27. He said the bank’s decision to drop a conditional commitment to keep rates unchanged represented a “tightening” of policy, adding that “going forward, nothing is pre- ordained.” Carney will likely make a similar statement when he appears at the Senate banking committee today at 10:30 a.m. New York time.

“Those lines were quite important,” said Douglas Porter, an economist at BMO Capital Markets in Toronto. “Clearly, the bank wants to keep its options wide open for June.”

Investors increased bets on a June 1 rate increase after the bank’s April 20 policy announcement dropped the pledge to keep the key interest rate at 0.25 percent through June, and said the timing of further action would depend on economic growth and inflation. Since then, Canada has reported an unexpected slowing of inflation and Greece’s debt crisis has led to declines in the Canadian dollar and stock prices.

“Carney sounded just slightly more cautious about the outlook,” said Mark Chandler, a fixed income strategist at RBC Capital Markets in Toronto. “He’s underscoring that they will evaluate things as they go along.”

Swap Rates Rise

The yield on the three-month overnight index swap, a measure of what investors predict the bank’s rate will average over that period, jumped 29 percent following the April 20 announcement and traded at 0.420 percent the following day, the highest in more a year. It traded for 0.411 percent yesterday.

Canada’s annual inflation rate slowed in March to 1.4 percent from 1.6 percent the previous month, Statistics Canada said April 23, as clothing and mortgage interest expenses declined while gasoline costs rose.

The bank sets interest rates to keep inflation at 2 percent, and its April 22 economic forecast predicted price gains “slightly higher” than that mark over the next year.

Carney also told the House of Commons panel he expects a “marked slowdown” in the housing market, and that fiscal challenges abroad are a risk to the global recovery. He also reiterated that “persistent strength” in the Canadian dollar is a risk to economic growth and inflation.

Stewart Hall, an economist at HSBC Securities in Toronto, said the testimony hasn’t changed his view for a June 1 rate increase. “I would have a hard time coming to terms with why the Bank of Canada would drop its conditional pledge so near to its natural expiry if it did not intend to hike rates” he wrote in an e-mail message.

Millan Mulraine, an economist at TD Securities in Toronto, wasn’t as definitive. “There is still a very good chance of a 25 basis point hike but it’s not a 100 percent certainty.”

--Editors: Paul Badertscher, Andrew Barden

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net.

Are Big Banks jumping the gun?

Rob Carrick

The Globe and Mail Published on Thursday, Apr. 29, 2010

Interest rates are rising – we all get that – but it looks like the Big Banks are pushing things a bit with mortgages.

After a pair of increases in the past two weeks, the posted Big Bank five-year fixed mortgage rate now stands at 6.25 per cent. Does that seem high? In fact, it’s just half a percentage point below the average level for the past decade.

We’re supposed to be in the early phase of what could be a long cycle of rate increases. The Bank of Canada hasn’t even started raising its overnight rate, which sets the trend for borrowing costs other than fixed-rate mortgages. The overnight rate could very well start rising June 1 (that’s the central bank’s next rate-setting date), but even then it’s not dead certain that rates will move.

Mortgage rates are linked to bond yields, which have been rising for a while now. But mortgage rates have been moving faster.

Thanks to the always helpful Bank of Canada online interest rate database, we know that the yield for five-year Government of Canada bonds has averaged 4.03 per cent since the beginning of 2000. Five-year Canada bonds had a yield of 3.02 per cent yesterday, which means they’re three-quarters of the way back to their average of the past decade.

The 10-year average for posted five-year fixed-rate mortgages is 6.75 per cent, which means this rate is almost 93 per cent of the way back to its long-term average. There is zero consensus that things have normalized after the financial crisis, but the banks are just about all the way back to pricing mortgages as if they were.

And, no, this “go big or go home” attitude to rates has not been extended to guaranteed investment certificates, which are one source the banks use for the money they lend out as mortgages. The current posted Big Bank five-year GIC rate tops out at 2.1 per cent, or 63 per cent of its 10-year average rate of 3.31 per cent.

John Turner, director of mortgages at Bank of Montreal, said the banks are simply reacting to the rising rate environment in setting borrowing costs for mortgages.

“It’s not about any of us trying to get ahead of things, because the market won’t let us,” he said. “It’s a very competitive market.”

Mr. Turner cited two factors that have driven fixed-rate mortgages lately. One is an effort by the banks to anticipate higher bond yields and avoid repeated increases in mortgage rates. “We don’t like to move rates because it causes dissatisfaction, and it causes disruption in the sales force.”

The other driver of higher mortgage costs is the rising cost of providing interest-rate guarantees for people who are smart enough to lock in a rate as soon as they start looking for a home. Mr. Turner said these costs haven’t been a factor much in recent years because the general trend for interest rates has been downward. Now, with rates on a definite upward path, rate guarantees are a bigger consideration for lenders.

Banks won’t say this out loud, but their own internal business considerations help set mortgage rates as well. Sometimes, this works in favour of borrowers. In February, for example, the banks lowered mortgage rates even as bond yields rose a tick or two. Now, the banks seem to be in a mood to emphasize profits over market share or, as it’s known in bank land, widen spreads between what they charge and what they pay.

“The banks normally do this when interest rates are moving,” said David McVay, a financial services industry consultant with McVay and Associates. “But their retail profits have been pretty strong, and they widened spreads quite well when they put up line-of-credit rates [in 2008-09]. That was a big boost to profits right there.”

Mr. McVay seconded Mr. Turner’s comment about the mortgage marketplace being too competitive for banks to be out of line with their mortgage rates. In fact, there is a huge variation in rates right now that demands some shopping around from homebuyers and people facing renewals.

One of the better deals in the mortgage market today is BMO’s offer of a 4.35-per-cent five-year, fixed-rate mortgage. You can’t take an amortization longer than 25 years with this mortgage, and there’s less room to make pre-payments than there is with a standard BMO mortgage. But a glance at the websites of several mortgage brokers yesterday suggests you won’t find a lower rate.

http://www.theglobeandmail.com/globe-investor/are-big-banks-jumping-the-gun/article1550163/

U.S. consumer confidence rises to 57.9 in April, highest since September 2008

Anne D'Innocenzio, The Associated Press NEW YORK, N.Y. - Americans' confidence in the economy rose in April to its highest level since September 2008, just as the financial crisis escalated, according to a private research group.

The upbeat reading, combined with bullish earnings reports this week from companies ranging from Whirlpool Corp. to UPS Inc., offers more hope the economic rebound is gathering steam. Meanwhile, a key home price index reported its first annual increase in more than three years, though it's too early to say the housing market is recovering.

The U.S. Conference Board, a private research group based in New York, said Tuesday that its consumer confidence index increased to 57.9, up from a revised 52.3 in March. The April reading is the highest since September 2008's 61.4. That was when the financial crisis intensified with the collapse of Lehman Brothers, sending confidence into freefall the following month. Economists surveyed by Thomson Reuters were expecting a reading of 53.5.

The index — which measures how shoppers feel about business conditions, the job market and the next six months — had been recovering fitfully since hitting an all-time low of 25.3 in February 2009. Economists watch the number closely because consumer spending including health care and other major items, accounts for about 70 per cent of U.S. economic activity.

April's reading is still far from what's considered healthy. A reading above 90 indicates the economy is on solid footing; above 100 signals strong growth. Still, the monthly survey of consumers showed that consumers' current and short-term concerns about jobs and the overall economy are easing.

Canada consumers get the blues, accountants brighten

(Reuters) - Consumer confidence fell in April in Canada, but the nation's accountants displayed optimism about the economy in the first quarter that approaches levels not seen since 2007, surveys on Tuesday showed. The Conference Board of Canada said its consumer confidence index was down a sharp 7.8 points to 84.8 this month.

"This last month was a surprise to see it come down," said Pedro Antunes, director of national and provincial forecasts at the Conference Board. "We think it may have something to do with the fact that there's a lot of news about interest rates and lending rates coming up."

Antunes said the market consensus that interest rates will rise this year has also spurred concern about a correction in Canada's booming housing market. Changes in mortgage rules and revised sales-tax regimes in Ontario and British Columbia have added to the concern about falling demand.

"Households are very heavily invested in their homes and if they feel there may be some correction to housing prices that may have played a role in the numbers," he said.

The quarterly Business Monitor survey done in March by the Canadian Institute of Chartered Accountants and Royal Bank of Canada, however, did not reflect the concern. The survey seeks the opinions of executive chartered accountants who have first-hand knowledge of the financial performance of Canadian companies.

Sixty-one percent of executive chartered accountants surveyed said they were optimistic about the economy over the next 12 months, up from the 48 percent who expressed optimism in the final quarter of 2009. The figure was in stark contrast to the 4 percent who were optimistic in the first quarter of 2009.

"The latest findings clearly underscore a growing comfort with the Canadian economy," Kevin Dancey, president and chief executive of the Canadian Institute of Chartered Accountants.

Inflation eases in March, gives central bank more wiggle room

Julian Beltrame, The Canadian Press

OTTAWA - Inflationary pressures in Canada eased considerably last month, putting into question expectations that the Bank of Canada will be raising interest rates in a matter of weeks.

Statistics Canada reported Friday that Canada’s annual inflation rate slipped by two-tenths of a point to 1.4 per cent, and the closely watched Bank of Canada core rate fell even further — by four-tenths of a point to 1.7 per cent in March.

On a month-to-month basis, Canadians saw no increase in overall prices between February and March.

The agency said the big reason for the drops in both annual indexes was that the price-distorting Olympics ceased being a major contributor to inflation with the conclusion of the Winter Games at the end of February.

Prices for traveller accommodation soared 64.1 per cent in February, but in March they dropped back to earth to a more tame 2.8 per cent increase from March 2009.

Earlier in the week, the Bank of Canada cited inflationary risks for dropping its year-old conditional pledge to leave interest rates at record lows until at least July after the core reached as high as 2.1 per cent in February.

Economists had expected a slight slip in core inflation, once the Olympics ended, but the consensus was that core inflation would be right on the central bank’s target of two per cent.

March’s large fall now puts the core inflation rate, which excludes volatile items such as gasoline prices, well below the central bank’s target.

The March data suggests prices continue to be soft across many sectors with the exception of gasoline and everything else to do with cars.

Prices at gas pumps across Canada were 17.2 per cent higher in March than they had been a year earlier, overall transportation costs were six per cent higher, prices for the passenger vehicles rose 3.9 per cent and the cost of insuring them cost 5.5 per cent more. But food costs only advanced 1.3 per cent, mostly due to a 2.6 per cent hike in restaurant bills.

As well, consumers paid slightly more for household operations and furnishings, for health and personal care, reading, tuition fees, and cable and satellite services. But many items cost less this March than they did a year ago, including shelter costs and mortgage costs, clothing and footwear, as well as fresh vegetables, meat and fresh fruit.

With interest rates at record lows, mortgage costs were a full six per cent less in March than a year ago. Regionally, the agency said all provinces recorded a price increases, with the Atlantic provinces registering the biggest gains. http://news.therecord.com/article/701309

Possible rise in mortgage rates pitting couples against one another

Steve Ladurantaye and Carly Weeks From Saturday's Globe and Mail

When Rae Whitton started house shopping with Dan Madge last year, she agreed to a variable mortgage rate after their broker explained rates were likely to remain low until spring, at which point they could lock into a fixed rate.

But when February came and signs indicated the economy was getting stronger, anxiety kicked in. Ms. Whitton e-mailed Mr. Madge newspaper articles warning of possible mortgage rate hikes, and worried about worst-case scenarios, remembering how her parents paid up to 18 per cent on their mortgage.

“I was just freaking out. Not that I think it will ever be like that again, but what if this happens? What would we do?” she said. “You always think of the worst thing.”

With mortgage rates set to climb in coming months from historic lows, the emotionally charged decision to lock into a predictable fixed-rate mortgage or gamble on a variable rate that could change at any time is pitting couples against each other as they try to plan their future.

Call it the Battle of the Sexes: the Housing Boom Edition.

Ms. Whitton was terrified that rocketing rates would price them out of their new Toronto home and pushed for the certainty of a fixed-rate. Mr. Madge wanted to take a chance that rates would be lower.

“I didn’t like the uncertainty of it,” Ms. Whitton said. “I like knowing how much our payments are going to be every month.”

The conflict is based on fear of the unknown, and the fear of losing a home if circumstances spiral out of control.

A study commissioned by the Bank of Montreal indicated that women were more likely to be overwhelmed when buying a home than men, at 44 per cent versus 28 per cent. Men were also more likely – 39 per cent vs. 26 per cent – to take interest rates into account when deciding whether to buy.

“When it comes to a risky situation which usually involves some kind of uncertainty, women tend to perceive negative consequences to be more likely and perceive negative consequences to be more severe,” says Li-Jun Ji, a psychology professor at Queen’s University in Kingston, Ont., who studies how decisions are made.

After debating for several months, Ms. Whitton and Mr. Madge went to the bank a few weeks ago and locked into a three-year fixed-rate mortgage. And while Ms. Whitton said she knows more of their payment is now going to interest, she’s not going to let it get to her.

“I just try not to look at the statements,” she said.

Variable rate mortgages can be had for about 1.75 per cent right now, while a 5-year fixed-rated can be had for about 4.5 per cent. A homeowner can save thousands by choosing variable, but their monthly payments will get higher every time interest rates increase.

With the Bank of Canada expected to move its key lending rate higher in June, the variable rate will increase as well. And if history is any indication, rates go up a lot faster than they go down. From 1980 to mid-1981, rates gained 67 per cent, making many mortgages unaffordable.

There’s no sense that will happen this time, but even small increases can mess up a tight budget.

For example, a five-year variable rate mortgage at 2.25 per cent on $300,000 would carry a monthly payment of about $1,300, assuming a 25-year amortization period. A move to 5 per cent would boost the payment to $1,750.

It’s that kind of uncertainty women may be hardwired to avoid, said Lise Vesterlund, a professor at the University of Pittsburgh who has studied the role gender plays in financial decisions.

“My own work has shown that women are less confident about their decisions,” she said. “There are evolutionary reasons for that, and you can also argue there are circumstantial reasons as well.”

She said men are natural risk-takers - after all, there was a time when they could reproduce indiscriminately and not worry about consequences, while the women had to be prudent and think about the future.

That sense of risk is still fostered by parents today, she said, with the majority of boys playing games that have measurable results while girls are offered activities that have no discernible conclusion.

“From an evolutionary standpoint, men have always had more to gain by taking gambles,” she said. “Women tend not to get the same kick out of taking risks – part of the reason they like to lock in to something is they want to have more information about what their prospects will be like in the future.”

http://www.theglobeandmail.com/report-on-business/possible-rise-in-mortgage-rates-pitting-couples-against-one-another/article1545411/

Bank signals higher interest rates only weeks away, as dollar soars

By Julian Beltrame, The Canadian Press

OTTAWA - The Bank of Canada signalled Tuesday it is poised to start raising interest rates in a matter of weeks, a move that will make borrowing costs higher on everything from car loans to mortgages.

Over the last few weeks, Canadians have already felt the impact of expectations that rates were due to rise - most major Canadians banks started hiking fixed-rate mortgage rates by as much as 0.85 per cent.

But with the central bank now saying it is prepared to move off its emergency 0.25 per cent overnight rate as early as June 1, the whole menu of variable and short-term rates are being brought into play.

"The one that will be affected is the prime lending rate... so the whole gamut will go up when the Bank of Canada raises its rate," said Bank of Montreal economist Michael Gregory. Those include variable-rate mortgages, lines of credit and short-term car loans, he said.

The bank is also risking sending the Canadian dollar into the stratosphere by moving significantly and robustly before the U.S. Federal Reserve moves off its own zero per cent interest rate policy.

The loonie soared within minutes of the central bank's 9 a.m. ET policy statement, which, while leaving the rate unchanged for now, made no secret of where it is headed.

The bank's governing council declared that with the economy and inflation growing faster this year than had been previously thought, there was no need to stay with its "conditional commitment" to leave rates unchanged 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.

The bank also said it was ending its key emergency lending instrument that helped inject liquidity into money markets during the crisis, which economists called a clear signal about the central bank's future intentions.

The dollar rose about 1.5 cents shortly afterwards, breaking through the parity ceiling with the U.S. greenback. It closed up 1.58 cents at 100.12 cents U.S.

The currency move suggested that while the market had expected bank governor Mark Carney to signal a tightening bias, it was surprised by the hawkish tone.

"Removing the conditional commitment to keep rates on hold until July and ending purchase and resale agreements are as good as cementing a June 1 hike," said economists Derek Holt and Karen Cordes Woods of Scotia Capital in a note to clients.

Holt added in an interview that the language from the bank opens the door for a bigger-than-expected hike in June, perhaps by as much as half a point.

Not all analysts believe the market is right to anticipate a June hike, however. Some say Carney is still leaving himself some wiggle room to stay at the lower bound until July 20, while others are advising the governor to wait until the Fed acts.

"I would keep rates unchanged until the Fed moves, because otherwise you create this problem on the Canadian dollar," said Brian Bethune, chief economist with IHS Global Insight.

A strong loonie is regarded as a brake on economic growth because it makes the price of Canadian exports less competitive in foreign markets.

In the statement, the central bank conceded the point, listing the "persistent strength of the Canadian dollar," along with poor productivity and low U.S. demand as "significant drags" on the Canadian economy.

But economists suggested the bank's language suggests it is prepared to live with a strong loonie.

Even so, economists that favoured a rate hike said the bank can only get so far ahead of the Fed. They note the Canadian bank has flown solo twice before in the past two decades, only to have to subsequently pull back.

"The need for emergency rates have passed but we still have a need for low rates," Holt explained.

C.D. Howe's monetary policy council, a sampling of nine economists, sees the bank's policy rate rising to 2.5 per cent by the spring of 2011. That is a significant hike from the current level, but it is still below what would be considered normal and only slightly above the rate of inflation.

While the tone on interest rates was hawkish, the bank's view on the economy was only mildly more rosy. It upgraded this year's growth to 3.7 per cent, from a previous prediction of 2.9 per cent, but it lowered its forecast for 2011 to 3.1 per cent, and it believes 2012 will only bring a 1.9 per cent advance.

It now expects the economy to return to full capacity in the spring of 2011, a full quarter before the previous estimate it made in January.

The bank did raise the temperature, slightly, on inflation.

It 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.

Interest rates must rise, but some analysts wonder what's the hurry

By Julian Beltrame

OTTAWA — It’s a minority view, but some economists are advising the Bank of Canada to hold off on raising rates — for a long time.

The reason, says Carl Weinberg of U.S.-based High Frequency Economics, is that the Canadian economy is not nearly as strong as recent data suggests and inflation is at acceptable levels.

He says Canada’s central bank could easily keep interest rates at record lows until next year and not worry about inflation getting out of hand.

That flies in the face of the prevailing view of economists, who believe Bank of Canada governor Mark Carney will start raising rates in July — or possibly even in June.

Carney is expected to give a strong hint into his thinking this week, starting on Tuesday with a scheduled interest rate announcement.

No one thinks he will move this week on the policy rate, which is at an emergency level of 0.25 per cent, but the governor is expected to issue a new forecast on both growth and inflation that will tip off when he will act.

Carney made a conditional pledge last spring not to raise rates until the end of the second quarter of 2010 unless inflation becomes a worry.

That’s going to be a high hurdle for him to jump if he does intend to move early, says Michael Gregory of BMO Capital Markets.

“If they go before June, there’s only one reason if they wanted to maintain their credibility, and that’s the inflation projection has changed,” he said.

“But that’s sending a pretty sharp inflation warning and I’m not sure what’s on the ground now justifies ringing that alarm bell.”

Statistics Canada reported last month that the core inflation rate, which the Bank of Canada watches closely, was 2.1 per cent in February while overall inflation was 1.6 per cent.

Both are within the central bank’s target range for the annual inflation rate, set at between one and three per cent.

The Canadian Press

New rules for rental properties could squeeze first-time homebuyers

By Derek Scott, The Canadian Press

VANCOUVER, B.C. - Buying a house in the hot housing markets of Vancouver, Toronto and other major cities in recent years has been a possible dream for some first-time homebuyers only because many of those houses had suites they could rent out.

But new rules coming into effect April 19 will all but wipe out that advantage in the eyes of banks handing out mortgages.

"It makes it much more difficult for people with rental properties to qualify for their own mortgage on their personal residence," said Vancouver mortgage specialist Patrick Mulhern.

The new regulations are designed to prevent speculation in the market, said Jack Aubrey, of the Canada Mortgage and Housing Corporation.

But Vancouver mortgage agent Mike Averbach said the new rules will do little to prevent investors from gambling in the housing market.

"They haven't decreased risk," he said. "They're just not allowing you to use the income."

Currently, landlords can use 80 per cent of their rental income to offset monthly mortgage payments. That means, if they receive $1,000 per month in rental income, they can use $800 to offset a $1,200 mortgage payment, leaving only $400 to be debt financed.

But under the new rule, only 50 per cent of a landlord's rental income will be used. Even then, that money will not be used to offset their monthly mortgage payment. It will be added to their total income, forcing them to qualify for the entire monthly mortgage.

For instance, a person earning $100,000 per year in regular income plus $12,000 per year in rental income will have a total income of $106,000 with which to qualify for a mortgage on their own home.

Rental income is essential for many of his clients, Averbach said.

In cities like Vancouver, where the average home price in February was more than $662,000, rental offset is the only way many people can qualify for a mortgage and the new rules will keep many of his clients in condos rather than houses, he said.

"Putting a renter in your basement is not speculative, it's reality," he said. "It helps you pay your mortgage."

The rule changes also make it more difficult for people to buy a property separate property to use as a revenue generator.

CMHC will no longer offer high-ratio financing on rental property not lived in by the owner. That means someone looking to buy a house as a rental investment will have to come up with a 20-per-cent down payment on the property, as opposed to five per cent before the rules changed.

The changes haven't worried groups advocating for tenants.

Jeordie Dent, of the Federation of Metro Tenants' Association in Toronto, where vacancy and availability rates have dropped over the last year, said he doesn't see a negative impact on renters.

Instead, he said his group welcomes the changes.

Dent said too many people become landlords without the financial or intellectual wherewithal to properly manage their properties.

"Anything that strengthens mortgage rules, from our perspective, is a good thing."

http://ca.news.finance.yahoo.com/s/03042010/2/biz-finance-new-rules-rental-properties-squeeze-first-time-homebuyers.html

When will the Bank of Canada raise interest rates and by how much?

Posted to FP: April 12, 2010, Jonathan Ratner

With most agreeing that a rate hike from the Bank of Canada is imminent, the talk now turns to the exact timing and extent of the central bank’s policy changes.

Governor Mark Carney made a “conditional” promise to keep the benchmark interest rate at 0.25% through the end of June 2010. However, one way to keep to this expiry date and provide markets with a jolt would be an initial rate hike of 50 basis points on July 20, according to Bank of America Merrill Lynch economist Sheryl King.

“Futures markets are only partially pricing in that possibility so it would be a shot across the bow to be sure,” she said in a note. “The strongest argument against this tack in our view is that the market would immediately rush to the conclusion that all future hikes will be similar in size.”

The economist thinks a 25 basis point hike on June 1 is the most likely scenario.

Meanwhile, Ms. King feels a 25 basis point hike on July 20 is the least likely scenario. She noted that this expectation is already fully priced into the Eurodollar and overnight index swap (OIS) markets. “If the Bank wants to elevate the risk premium in the bond market, validating market pricing cannot be the way they will go.”

The economist said that with growth running 40% faster than the Bank of Canada’s January forecasts, a rollover in unemployment and core CPI “frustratingly high,” there is justification to move a bit early. She added that moving early rather than large would help build up that needed risk premium without having 10-year notes move above the 6% mark that a normalized risk premium of 1.8% and a neutral overnight rate of roughly 4.5% would command.

The main arguement against a June 1 rate hike is that it comes ahead of the June 30 expiry commitment and puts the Bank’s credibility in the market at risk. Ms. King insists that credibility in achieving the central bank’s 2% inflation target is “very arguably the more important badge to maintain.”

“All along, the Bank has warned investors the commitment to not touch rates was not a promise and earlier rate hikes possible if conditions warranted.” http://network.nationalpost.com/NP/blogs/tradingdesk/archive/2010/04/12/when-will-the-bank-of-canada-raise-interest-rates-and-by-how-much.aspx

Rates staying low into next year

Julie Fortier, Financial Post

OTTAWA - With the Canadian economy doing surprisingly well over the past six months, many see higher interest rates from the Bank of Canada in the not so distant future, but according to a report released Thursday from CIBC's chief economist Avery Shenfeld, rates are likely to remain at a very low 2.5% through to 2011.

In CIBC World Markets' latest Global Positioning Strategy report, Mr. Shenfeld lists several reasons for Bank of Canada Governor Mark Carney to keep interest rates subdued after July. He points out that the U.S. will probably have a more gradual approach to raising rates and if Canada gets too far ahead, that could send the Canadian dollar soaring.

"While factories are recovering in Canada alongside a global industrial revival, output remains nearly 20% below the pre-recession peak, and wages are now substantially above those stateside without the productivity gains to match. There's only so much of a competitive challenge that non-resource exporters can take in short order," Mr. Shenfeld said.

He also pointed out that inflation is not expected to rise much further and stimulus spending is expected to be reigned in by governments - including Canada's - which will slow growth.

"If the U.S., the U.K., and Japan all move from huge stimulus to even modest restraint, Canada will feel it in our export prospects come 2011," Mr. Shenfeld pointed out.

Mr. Carney has promised to keep interest rates where they are at 0.25% until the end of June. However, the latest reading of Canada's economic growth showed the core inflation rate at 2.1% in February, far above the Bank of Canada's forecast of 1.6% for the first quarter of the year. Many analysts believe the Bank of Canada will not wait until mid-2010 to raise rates.
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Loonie closes in on parity as Canadians and firms look to hedge bets

By Julian Beltrame, The Canadian Press

OTTAWA — The high-flying loonie renewed its flight towards parity Monday, forcing firms and individuals to adjust to what many believe will become a new normal in the relative value of the two currencies.

Boosted by cycle-high prices for oil and commodities, the loonie soared to within a whisker of parity Monday, reaching as high as 99.87 cents US before closing at 99.72.

The currency has been flirting with par for more than a month, and economists believe it is now only a matter of time before the psychologically important barrier is breached.

“We’re one good number away from seeing the Canadian dollar through parity,” said CIBC chief economist Avery Shenfeld.

If it doesn’t happen earlier, the trigger may be Friday’s employment report for March, particularly if Statistics Canada announces a higher gain than the 25,000 consensus call.

Scotiabank economists sent a note to clients Monday predicting the dollar will appreciate “well north of parity over the spring and summer months.”

RBC currency analyst Matthew Strauss also believes the loonie could stay above parity for several months, although his view is that it will dip slightly below the greenback later in the year when the U.S. starts hiking interest rates.

Regardless of which side of the line the currency trades at any given time, Strauss said Canadians should get used to a strong loonie — within five cents of parity either way — perhaps for years.

Economists say the shock for Canadians won’t be as acute this time as in the fall of 2007, when the loonie rose as high as $1.10 US, resulting in a flood of cross-border shoppers heading south for bargains, and a commensurate dwindling of traffic the other way.

A recent report by the Conference Board of Canada suggested that many industries, particularly multi-nationals in the manufacturing and oil and gas sectors, had globalized their operations to mitigate against a stronger Canadian currency.

Still, there were indications Monday that many Canadians are looking to insulate themselves against currency fluctuations.

Toronto-based currency broker Knightsbridge Foreign Exchange said business has been brisk — about three or four times higher than normal — with small firms and individuals anxious to hedge against volatility.

Knightsbridge president Rahim Madhavji said small firms that import from the U.S. want to ensure that their purchase price won’t be wildly different when it comes time to pay in U.S. dollars. And he says he’s also getting calls from Canadians buying homes in U.S. vacation spots who want to lock in the purchase price months before the closing date.

“Volatility is good for our business,” he said. “People are hedging now because . . . who knows what the rate is going to be in 90 days.”

Kevin Desjardins of the Tourism Industry Association of Canada said the country’s 180,000 tourism operators are also keeping a close eye on the currency, knowing that each cent of appreciation likely means a little less business for them.

With summer’s peak season approaching, the loonie’s strength couldn’t come at a worse time for an industry already hobbled by the poor economy in the U.S. and new border restrictions that require American visitors to carry passports.

“You have to think of tourism as an export industry and like any export industry, a strong Canadian dollar is going to have an impact on our ability to get foreigners to buy Canadian,” he explained.

Many industries have made adjustments for the currency, said Avrim Lazar of the Forest Products Association of Canada, but no one should fool themselves into thinking there isn’t a stiff price to pay whenever the loonie appreciates.

He said a strong dollar means that as his industry recovers from recession, mill owners are likely to re-open in the U.S. over Canada, meaning jobs will go south.

“The government and the (Bank of Canada) feeling complacent about a high dollar would be a serious error (because) we export most of our non-government GDP to the U.S.,” he explained.

Economists say there is not much the central bank can do about the currency because it is appreciating on fundamentals — rising oil and commodity prices, the relatively low national debt, expectations interest rates will rise, and an economy recovering faster than expected and faster than most industrialized countries.

Strauss said the loonie has risen faster than any major currency since the beginning of the year, but looked at in the context of other so-called commodity plays, it has not been a fluke.

“The rally in commodities started in March 2009 and if we look at commodity currencies (Norway, Australia, New Zealand), we’re pretty much in the middle of the pack,” he said.

http://news.therecord.com/Business/article/693916

Canadian economy grows faster than expected in January

OTTAWA – The stalwart Canadian economy marched doggedly forward in January, growing faster than anticipated thanks to a healthy boost from a manufacturing sector that appeared to be in full rebound from the recession.

The month’s 0.6 per cent rise in real gross domestic product, reported today by Statistics Canada, was the biggest one-month lift in more than two years and just ahead of an economist consensus forecast of 0.5 per cent.

“The Canadian recovery is becoming more fully entrenched and is showing surprising strength, with the goods-producing sector in full rebound mode,” Douglas Porter, deputy chief economist for BMO Capital Markets, wrote in a note to clients.

“Importantly, the recovery looks to be broadening beyond the initial push in housing and consumer spending, as manufacturing has advanced for five straight months.”

The solid improvement will likely put more pressure on the Bank of Canada to raise interest rates in the next couple of months from their historic lows of 0.25 per cent.

Goods-producing industries grew 1.3 per cent, largely on the strength of manufacturing and construction, the agency said. After a 1.2 per cent gain in December, manufacturing was up 1.9 per cent in January, with 17 of 21 major groups advancing.

The construction sector advanced 1.7 per cent, on a four per cent increase in residential construction and a one per cent rise in engineering and repair work. Non-residential building construction bucked the trend, falling off a slight 0.5 per cent.

“These are unambiguously strong results, with GDP now rising at a whopping 6.9 per cent annual pace over the November-to-January period,” Porter said.

“And, the economy has already recouped more than half of its recession losses, with GDP now up by 2.7 per cent from last May’s low.”

The loonie rose following the announcement, moving up 0.43 cents to 98.52 cents US in morning trading.

Mining and oil-and-gas extraction also increased in January.

The production of services advanced 0.4 per cent, led by wholesale trade.

Retail trade, the finance and insurance sector, transportation and the public sector also rose.

Meanwhile, the output of real estate agents and brokers, some tourism-related industries as well as agriculture and forestry retreated.

The volume of wholesaling activity increased 2.9 per cent with all wholesaling trade groups posting gains except apparel and alcohol and tobacco.

Value added in the retail trade sector rose 0.8 per cent in January.

Significant increases were registered in building and outdoor home supplies stores, home furnishings stores as well as food and beverage stores. Declines were recorded at new- and used-car dealers and at gasoline stations.

Porter added that early statistics for the month of February also look promising, with the gain of 60,000 full-time jobs, housing starts up six per cent and auto sales at their highest level in almost two years.

“Given today’s results, and the fact that February is shaping up well, first-quarter GDP growth looks set to easily surpass our recently revised call of a gain of 4.7 per cent (let alone the Bank of Canada’s latest estimate of 3.5 per cent), with growth on track for 5 ½ per cent even if the next two months come in at just up 0.2 per cent.”

The Canadian Press http://news.therecord.com/Business/article/691423