Calgary Alberta Mortgage and Real Estate News

The Bank of Canada on Tuesday maintained its target for the overnight rate at 4.25%, but suggested that future rate hikes might be needed to contain inflation.

In an accompanying statement, the central bank said information received since the April Monetary Policy Report indicates that economic growth and inflation in Canada in the first part of this year have been “stronger” than the bank was expecting.

The bank judges that “there is an increased risk that future inflation will persist above the 2% inflation target and that some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target,” according to the statement.

“With this statement, the [Bank of Canada] has signaled it is prepared to hike interest rates by [a quarter percentage point] at its next meeting on July 10,” said Michael Woolfolk, senior currency strategist at The Bank of New York.

Woolfolk said the Canadian dollar could “easily reach 1.05″ against the U.S. dollar in the second half of this year.

The Canadian dollar, also known as the loonie, rallied on the news, last trading up 0.7% at C$1.0721 vs. the greenback.

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 4 1/4 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 4 1/2 per cent.Information received since the April Monetary Policy Report (MPR) indicates that economic growth and inflation in Canada in the first part of this year have been stronger than the Bank was expecting. In April, both total CPI inflation, at 2.2 per cent, and core inflation, at 2.5 per cent, were above expectations. On the basis of available information, the Canadian economy is likely to have grown at an annual rate of about 3 1/2 per cent in the first quarter of this year - a full percentage point higher than was estimated in the MPR. The Bank now judges that there is somewhat greater excess demand in the economy than was thought to be the case in April. U.S. economic activity has come in largely as expected and continuing robust growth outside North America has maintained the global demand for, and high prices of, many commodities produced in Canada. Against this overall backdrop, the Canadian dollar has risen appreciably above the range assumed in the Bank’s April projection.

On balance, the Bank judges that there is an increased risk that future inflation will persist above the 2 per cent inflation target and that some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target.

An updated analysis of the Bank’s outlook for growth and inflation, including economic and financial developments, trends, and risks, will be set out in the Monetary Policy Report Update, to be published on 12 July 2007.

Information note:
The Bank of Canada’s next scheduled date for announcing the overnight rate target is 10 July 2007.

After leaving its key interest rate unchanged for the last year, the Bank of Canada could be about to signal that higher rates are on the way, some analysts are forecasting.

The central bank will release its next interest rate policy announcement at 9 a.m. ET Tuesday.

While no one is expecting a rate hike on Tuesday, some rate watchers say the central bank and its governor, David Dodge, could lay the groundwork for the overnight lending rate to jump as early as the following meeting on July 10.

The key overnight rate has been stuck at 4.25 per cent since May 2006. Any change in this interest rate triggers an immediate change in rates charged for variable mortgages and many demand loans and lines of credit.

TD Economics, for one, thinks the next rate hike could be as early as July, with another hike to follow in September. “The inflation backdrop has become troubling enough, in our view, to fully justify the bank finally moving off the sidelines,” said TD Securities chief economist Marc Lévesque in a commentary.

BMO Capital Markets agrees that the Bank of Canada will move off the sidelines, but not before the fall. “We judge that that Canadian dollar appreciation … and the prospects for continued slow growth will likely keep Dodge & Co. on the sidelines, at least through the summer,” wrote BMO senior economist Michael Gregory.

But he said his firm was “pulling forward our forecast for a first [central bank] rate hike into late 2007 from early 2008.”

RBC Economics also expects a later 2007 rate hike.

“With the core inflation rate well above the two per cent target and the domestic economy gaining steam, the odds of a significant slowing in price pressures are waning, making a very strong case for a policy interest rate increase later this year,” says RBC senior economist Dawn Desjardins.

Markets gird for rate increase
The markets are now fully pricing in at least one rate hike before the end of the year. Mortgage rates have already begun to head up as bond yields have risen in anticipation of higher rates. 

The mere prospect of higher interest rates has helped to boost the Canadian dollar to a 30-year high near the 93-cent US level.

The C.D. Howe Institute asked its nine-member monetary policy council to weigh in on what they think the Bank of Canada should do, as opposed to what they think the bank will do.

Their verdict? The majority think the central bank should raise its key overnight rate right away from the current 4.25 per cent to 4.50 per cent. “Both headline and core inflation are running ahead of the bank’s target,” the council said in a statement.

The core inflation rate — which excludes volatile items such as gasoline and fresh fruit and vegetables — surged to a four-year high of 2.5 per cent in April.

The Royal Bank of Canada, the nation’s largest bank by assets, forecasts the Canadian dollar will strengthen 2 percent to C$1.08 by the end of the third quarter, on expectations the country’s benchmark interest rate will increase this year to curb inflation while the U.S. Federal Reserve stays on hold. The outlook was revised higher last week from the firm’s previous forecast of C$1.13, according to Monica Fan, global head of foreign-exchange strategy at RBC in London. The currency will drop back to C$1.10 by the end of the fourth quarter, stronger than the firm’s previous estimate of C$1.12, Fan said. The Canadian dollar is nearing a 28-year high of 91.44 cents, matched on May 31, 2006. Futures traders last week placed the largest bet for the Canadian dollar to rise since the week ended Oct. 6, further adding to the currency’s momentum, figures from the Washington- based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on an advance in the Canadian dollar compared with those on a drop — so-called net longs — was 8,851 on May 1, compared with net shorts of 1,631 a week earlier. Largest Bet The data shows a reversal from bets on the Canadian dollar to fall, according to CFTC data. Futures are agreements to buy or sell assets at a set price and date. The figures reflect holdings in currency-futures contracts at the Chicago Mercantile Exchange as of May 1. Interest-rate futures traders have increased bets for a Bank of Canada rate increase later this year. Policy makers kept the benchmark lending rate at 4.25 percent on April 24 for a seventh straight meeting. The yield on the September bankers’ acceptances futures contract has gained 41 basis points, or 0.41 percentage point, since March 5 to 4.46 percent on the Montreal Exchange. Bankers’ acceptances futures have settled at a three-month lending rate averaging 16 basis points above the central bank’s rate target since Bloomberg started tracking the difference in 1992. Fed Cut Foreseen The Federal Reserve will lower its benchmark lending rate between banks by 25 basis points to 5 percent by the end of the year to stimulate a slowing U.S. economy, according to the median of 71 economists polled by Bloomberg on April 9. The yield on Canada’s benchmark 10-year bond maturing June 2016 fell a second day by 2 basis points to yield 4.19 percent. The price, which moves inversely to yield, gained 16 cents to C$98.65. The yield premium, or spread, between the 10-year U.S. Treasury and its Canadian counterpart narrowed to 45 basis points, near a 12-month low reached May 4.

The Canadian dollar was slightly
higher versus the U.S. currency on Thursday but further moves
were expected to be limited given the lack of any significant
domestic data and ahead of a key U.S. jobs report due on
Friday.
 Domestic bond prices were slightly lower, handing back a
portion of recent gains fueled by the diverging monetary policy
risks between Canada and the United States.
 At 9:15 a.m. (1315 GMT), the Canadian unit was at C$1.1073
to the U.S. dollar or 90.31 U.S. cents, up from C$1.1087 to the
U.S. dollar, or 90.20 U.S. cents, at Wednesday’s close.
 With no key Canadian data to consider, currency traders
were expected to stick close to the sidelines until details of
the U.S. jobs report surface.
 Any weakness in the U.S. labor market could further boost
the case for interest rate cuts by the U.S. Federal Reserve
while the Bank of Canada is widely expected to keep interest
rates unchanged for the foreseeable future.
 ”I think the market is fairly stable ahead of tomorrow’s
key U.S. payrolls report and I don’t think we are going to see
a big move ahead of that critical number,” said Doug Porter,
deputy chief economist at BMO Capital Markets.
 ”If it’s a very weak report then I think there will be some
questions raised over whether Canada’s economy will also
succumb to some U.S. weakness.”
 But Porter said if the report is “a bit below” forecasts
then it could be ideal for the Canadian dollar because it could
open the door for Fed easing while the U.S. economy would not
undercut commodity prices.
 Wednesday’s testimony before a Senate banking committee by
Bank of Canada Governor David Dodge and Senior Deputy Governor
Paul Jenkins after the market closed did not spark any sharp
moves for the Canadian currency.
 Dodge said the central bank would not consider currency
intervention even if the Canadian dollar rises as high as 92.5
U.S. cents. He also said it was too soon to determine whether
the 4-percent rise in the currency against the U.S. dollar over
the past four weeks would require a change in interest rates.
 Stronger economic data in Canada, higher commodity prices,
and takeover interest in Canadian companies have fueled the
currency over the past six weeks.
 Merger-related interest in the Canadian currency could
continue as Swedish specialty steel maker SSAB (SSABb.ST: Quote, Profile, Research said
it had made a recommended cash offer for Ipsco (IPS.TO: Quote, Profile, Research that
values the firm at $7.7 billion.
 BONDS SLIDE
 Bond prices were lower as the absence of any key Canadian
data forced it to follow the drop in the bigger U.S. treasuries
market.
 Data that showed Canadian foreign reserve holdings rose by
$874 million in April to $40.18 billion, did little to spur a
move in the bond market.
 The two-year bond eased 2 Canadian cents to C$99.13 to
yield 4.192 percent, while the 10-year bond retreated 9
Canadian cents to C$98.46 to yield 4.206 percent.
 The yield spread between the two-year and 10-year bond
moved to 0.3 basis points from 0.8 at the previous close.
 The 30-year bond fell 35 Canadian cents to C$123.60 to
yield 4.245 percent. In the United States, the 30-year treasury
yielded 4.822 percent.
 The three-month when-issued T-bill yielded 4.17 percent,
down from 4.18 percent at the previous close.

Bank of Canada Governor David Dodge may keep interest rates unchanged for the longest stretch in five decades as inflation is tempered by a slump in U.S. demand for Canadian exports.Dodge, nearing the end of his seven-year term, will probably keep the benchmark rate at 4.25 percent tomorrow for the seventh-straight meeting. Some economists predict no interest rate changes before Dodge’s term ends in January, capping the longest pause since 1954.

“It’s almost an ideal world for the Bank of Canada,” said Doug Porter, an economist with BMO Capital Markets in Toronto. Core inflation, which discounts items such as fruit and gasoline, hovers near Dodge’s 2 percent target, and the economy’s “close to full capacity,” he said.

The world’s eighth-biggest economy has remained stable during global turmoil in part because Dodge hasn’t overreacted to events such as the fastest rise in the Canadian dollar since World War II. The currency’s surge prompted manufacturers such as jetmaker Bombardier Inc. to push for lower borrowing costs.

“Rates have been relatively stable given the massive shocks hitting the global economy,” said John Johnston, who helps manage about $2.6 billion in Toronto as chief strategist at the Harbour Group, a unit of Royal Bank of Canada. “It reflects a maturing of the bank’s monetary strategies.”

Lessons From 2003

Dodge, 63, may have learned from April 2003 when he tightened only to ease in July, underestimating the impact of slower U.S. auto imports and outbreaks of SARS and mad-cow diseases. The central banker left rates alone last May as investors called for an eighth-straight increase, and again at the end of 2006 as exporters lobbied for a reduction.

The bank’s six-member governing council, led by Dodge, deserves praise for “keeping the economy on a pretty good even keel,” said Dale Orr, Toronto-based managing director of Canadian research for Global Insight, a forecasting firm. “There is a reasonable amount of judgment involved, so you can give them credit.”

Since July, Dodge has said the risk of inflation veering from his target is balanced by stronger consumer spending and weaker U.S. demand for Canadian goods. Monthly data has so far borne this out, with core inflation between 2 percent and 2.4 percent, even with the jobless rate at a three-decade low.

If the bank keeps the overnight rate at 4.25 percent tomorrow, the pause would surpass a 2004-2005 stretch, and rival an 18-month run that ended in March 1973. Pausing through Jan. 31, when Dodge’s term ends, would extend it to 20 months, a streak not seen since the first governor, Graham Towers, retired in 1954.

All 22 economists in an April 19 Bloomberg survey forecast no rate change tomorrow.

Safest Thing

Dodge, who meets the bank’s board in June to discuss his future, will also keep rates unchanged through the first quarter of 2008, according to the median estimate of 11 economists surveyed by Bloomberg News April 4-9.

“The safest thing to do is nothing,” said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, who predicts no rate change this year. “There are two diverse and opposing sets of forces the bank has to deal with,” namely strong growth in oil-rich Alberta and slower growth in manufacturing-heavy Ontario and Quebec, he said.

The economy may not stay close to capacity. Some forecasters predict a strong dollar, trading close to a five- month high, and sluggish labor productivity will limit economic growth to 2.3 percent this year, according to a Bloomberg survey. That pace is half a percentage point below what the central bank says the economy can tolerate before inflation accelerates.

`Slowdown Contained’

Still, the slowdown has been limited to exports of lumber and other housing-related materials, said Jonathan Basile, an economist at Credit Suisse in New York. “Canada still has a lot of natural resources that will be in demand for a long time,” he said.

Some investors are betting any rate move this year would be an increase. They point to the 6.1 percent jobless rate and February’s core inflation rate of 2.4 percent, a four-year high. The yield on the December bankers’ acceptance contract, tied in part to the central bank rate, rose to 4.42 percent April 19, from 3.97 percent March 7 on the Montreal Exchange.

Dodge, who hasn’t indicated whether he’d seek a second term, says he isn’t focused on the long pause in rate moves.

“What we are trying to do, always, is to have monetary conditions such that we will hit our inflation targets,” Dodge said in an April 13 interview in Washington during a meeting of the Group of Seven industrialized nations. “What it reflects is exactly what we’ve said, that we think that they are appropriate to do that.”

The Canadian dollar extended its recent charge to close at its highest level in 4-1/2 months against the U.S. currency on Thursday, helped partly by a rise in oil prices and foreign interest in Canadian companies.Domestic bond prices turned lower alongside the bigger U.S. treasuries market, but the move was limited ahead of Canadian trade data on Friday and more key data next week.

The Canadian dollar closed at C$1.1345 to the U.S. dollar, or 88.14 U.S. cents, up from C$1.1398, or 87.73 U.S. cents, at Wednesday’s close.

The resource-linked currency, which has recorded sharp gains all week to return to levels not seen since last November, took advantage of a slew of Canadian dollar-positive events, most notably a 3 percent jump in oil prices.

“It’s the rising energy prices … continued news on the M&A activity which is bullish for the Canadian dollar and the U.S. dollar itself was a little weaker,” said Carlos Leitao, chief economist at Laurentian Bank of Canada.

“The trend right now is very strong and the (Canadian) dollar doesn’t seem to want to come down so it’s going up.”

The latest report of potential foreign interest in Canada involved steelmaker Ipsco Inc. (IPS.TO: Quote), which has a market capitalization of about C$7.8 billion, and said on Thursday it was in discussions that could lead to a sale of the company.

The Canadian dollar had little reaction to a report showing new housing prices rose 0.5 percent in February from January, as analysts said last week’s strong jobs data and signs of building inflation were still driving the currency.

Recent strong data has quieted previous talk of Bank of Canada interest rate cuts, and prompted analysts to start speculating about the timing of possible rate hikes, which would raise the yield on Canadian investments and boost the currency.

In a speech in Montreal, Bank of Canada Deputy Governor Sheryl Kennedy did not talk about the country’s economic outlook or the central bank’s upcoming rate decision.

The Canadian dollar jumped
against the greenback on Thursday, reaching a 3-1/2 month high,
after a surprisingly powerful March employment report suggested
to some that the Bank of Canada will eventually hike interest
rates.

 The currency closed at C$1.1506 to the U.S. dollar, or 86.91 U.S. cents, up from C$1.1592, or 86.26 U.S. cents, at Wednesday’s close.
 The Canadian economy added a whopping 54,900 jobs in March, blowing past forecasts for a 15,000-job gain, while the unemployment rate stayed unchanged at a 31-year low of 6.1 percent.
 The stronger than expected report was the latest in a string of robust monthly jobs reports, and pushed the currency as high as C$1.1487, or 87.05 U.S. cents, a level it has not touched since late December. The Canadian unit eased slightly in the afternoon, as market participants drifted away for the Friday Easter holiday.
 ”The employment rate, arguably the best measure of labor-market strength, is at a record high,” at 63.5 percent, said Warren Lovely, senior economist with CIBC World Markets in Toronto.
 ”Tightness in the labor market is going to prevent the Bank of Canada from entertaining easier (monetary) policy and the Canadian dollar is reacting as you might expect, it’s getting a bit of a bid,” Lovely said.
 The Ivey Purchasing Managers Index, also released on Friday, painted an upbeat picture as well. It rose to 67.3 in March, the highest result since last June. An index reading above 50 indicates an increase in purchasing activity.
 Market talk continued to shift away from expectations of interest rate cuts and towards the timing of a possible hike, which would raise yields on Canadian investments and boost the Canadian dollar.
 However, analysts expect the central bank to hold rates steady at its next decision date of April 24.
 Canadian markets will be closed on Friday, when the U.S. March non-farm payrolls data is due for release. The market is anticipating about 120,000 new jobs. U.S. financial markets will close early, and thinly staffed desks often exaggerate price moves.
 BONDS EDGE LOWER
 Bond prices retreated on the jobs data, even though moderate wage growth suggested to some that the Bank of Canada will not have to raise rates in the near future to stave off inflation. U.S. treasuries also moved lower.
 The Bank of Canada’s overnight rate stands at 4.25 percent.
 The two-year bond fell 11 Canadian cents to C$99.42 to yield 4.033 percent, while the 10-year bond fell 23 Canadian cents to C$98.93 to yield 4.142 percent.
 The yield spread between the two-year and 10-year bond moved to 10.9 basis points from 13.3 at the previous close.
 The 30-year bond slid 40 Canadian cents to C$124.30 to yield 4.208 percent. In the United States, the 30-year treasury yielded 4.876 percent.
 The three-month when-issued T-bill yielded 4.18 percent, unchanged from the previous close.

Canada’s economy expanded for a fourth-straight month in January, led by a rebound in energy production.The economy grew 0.1 percent during the month, from a pace of 0.4 percent in December, Statistics Canada said today in Ottawa. Economists had forecast 0.2 percent growth, according to the median of 26 estimates in a Bloomberg News survey.

The Canadian dollar is poised for its biggest monthly gain since August, amid evidence the nation’s economy is rebounding from a fourth-quarter slowdown. Canada’s pace of expansion, at a three-year low of 1.4 percent in the fourth quarter, may have doubled that rate in the first quarter, economists say.

“Moderate further gains in February and March should give us a 3 percent rate for the first quarter,” said Ted Carmichael, chief Canadian economist for J.P. Morgan Securities Inc. in Toronto.

Investors and economists have been trimming bets for an interest-rate reduction. The yield on the banker’s acceptance contract due in September was trading at 4.31 percent in Montreal today, suggesting some investors are speculating the central bank will raise its 4.25 percent benchmark rate. That yield has risen from as low as 4.05 percent three weeks ago.

The Canadian dollar has gained 1.5 percent this month, trading at 86.71 U.S. cents at 11:06 a.m. in Toronto. The currency has gained 27 percent against the U.S. dollar over the past four years.

Job Gains

Canadian employers have added workers for six consecutive months, including more than 100,000 new jobs in the first two- months of this year, a trend that likely continued into March, according to a survey of economists by Bloomberg News. Canada’s March jobs report is scheduled for release on April 5.

The country’s core inflation rate, the measure most closely monitored by the Bank of Canada and which excludes volatile goods such as gasoline, rose 2.4 percent in February from a year ago, the fastest pace since March 2003, Statistics Canada said last week. The Bank of Canada, which has warned that the economy is at full capacity, sets borrowing costs to keep inflation at 2 percent, and the core rate has been at or above that target since July.

To be sure, the higher Canadian dollar and slowing U.S. growth continue to weigh on the nation’s economy. Factories cut production by 1 percent in January, led by a 12 percent decline by automakers, the statistics agency said today.

Activity by wholesalers and retailers also was tepid in January. Output generated by the nation’s wholesalers rose 0.1 percent, while retailers reduced by 0.2 percent, Statistics Canada said.

U.S. Housing

Bank of Canada Governor David Dodge said yesterday the U.S. housing market’s slump is lasting longer than the central bank had forecast. Canada sends more than 80 percent of its exports to the U.S., including lumber and other building supplies.

Still, construction, one of the main drivers of the nation’s expansion in recent years, remains buoyant, according to today’s report. Construction advanced for an eighth straight month, gaining 0.5 percent in January, today’s report said.

Energy companies, which generate 5.7 percent of the nation’s economic output and have been one of the main job creators in recent years, also rebounded in January with a 1.5 percent increase in production.

With the “economy operating at its capacity limits, core inflation running above target, and the economy likely to expand close to its potential rate in the first quarter, the odds remain heavily tilted towards the Bank remaining firmly on the sidelines,” Marc Levesque, chief economics strategist at TD Securities in Toronto, said in a note to investors.

Bank of Canada Governor David Dodge said on Thursday the central bank had been surprised by the rise in Canada’s core inflation to 2.4% in February from 2.1% in January, but cautioned against putting too much emphasis on data from one month.”Obviously it was more than most economists, including ourselves, were expecting,” said Dodge, who uses core inflation to guide the bank’s interest rate policy.

“There could well have been some special factors in that, and we’re going to have to evaluate, when we get a little more, whether there’s any change there or not,” he added.

He also told a news conference that the Bank of Canada did not see any extra stimulation from this month’s federal budget than what was originally envisaged in the bank’s forecasts.