Tuesday, March 8, 2011

RBC expects BoC to resume rate hikes in May

I tend to agree with this report. "Nothing is forever" and we have had great rates for a very long time - so prepare for rising rates but do not panic and lock in necessarily- Floating rates historically have ben better than fixed and although they may rise the next few years there is no reason to think that history will not repeat itself. Do your research before you make your move.

Neil "Mortgage Man" McJannet


Canada’s economy kicked it up a notch in the final quarter of 2010 with annualized real GDP growth of 3.3% following an upwardly revised 1.8% rise in the third quarter. The main surprise in the fourth quarter report was the strength in consumer spending, which combined with a sharp increase in net exports supported the above-consensus gain. The strong consumer and export demand resulted in a sharp draw down in inventories, which is likely to be followed by higher production in the quarters ahead as stock levels are rebuilt. The improvement in Canadian export growth occurred as the U.S. economy showed signs of renewed vigour. Expectations that U.S. growth will accelerate further in 2011 augur well for Canada's trade sector to make a solid contribution to the expan- sion while the economy transitions from relying heavily on consumer spending to busi- ness investment.
Bank doesn’t bite as economy gears up...

The Bank of Canada left the overnight rate unchanged at 1.00% on March 1, 2011, and even with the stronger than expected fourth-quarter 2010 GDP report in hand, did not indicate that that its 2011 growth forecast is headed higher. Rather, the Bank made lim- ited mention of the fact that the economy proved to be much stronger than it expected in late 2010 by only remarking that the recovery “is proceeding slightly faster than ex- pected.” The bottom line is that the statement was largely a reprisal of the tenets of the Bank’s January forecast thereby reiterating that policymakers are worried that the firm Canadian dollar combined with poor Canadian productivity may limit the gains made in the export sector and in turn the pace of expansion.

...and is waiting to be convinced

The Bank is unlikely to stay on the sidelines for long if the data continue to show that the economy is maintaining its upward momentum. The economy solidly outperformed the Bank’s forecast in the final quarter of 2010 and December GDP’s 0.5% monthly gain sets the course for another quarterly outperformance relative to the Bank’s 2.5% projection. The strength in the recent data has increased the likelihood that the Bank will upgrade its economic outlook in the April update. Faster growth risks a quicker closure of the output gap than in the Bank’s baseline forecast and core inflation rising to the 2% target ahead of schedule. Having said that, the risks to the world economy from geo-political events and elevated debt levels mean that the Bank is unlikely to make any quick moves that risk destabilizing the economy. The Bank still needs to be convinced that the stronger momentum will continue. Our forecast is that the economy will record another solid gain in the first quarter of 2011 of 3.7% and will grow by 3.2% over the entire year, well above the Bank’s current 2.4% estimate. The risk to the Bank’s current outlook is skewed to the upside, and we maintain our call for the overnight rate to rise by 100 bp in 2011 with the first hike expected in May.

Our outlook for 2011 is little changed although we now expect the Canadian dollar to be slightly firmer over the forecast period, and as indicated, assume a later start date for the Fed’s initial rate increase. Against this backdrop, we trimmed back the amount of tight- ening that we expect from the Bank of Canada in 2012. Our updated forecast is for an overnight rate of 3.0% at year-end 2012, down from 3.5% in our previous forecast.

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