Subject: Interest Rate Perspective for 2012
The Bank of Canada is keeping interest rates at historic lows — likely for another year. As expected, the central bank kept its trendsetting policy rate at one per cent Tuesday, January 17, 2012. But in a gloomy new assessment of economic conditions, the bank implies it has no choice. In a statement accompanying the announcement, the bank warned that global economy has, if anything, "deteriorated" since its last forecast in October and that risks arising from the European debt crisis have intensified. For Canada, the global weakness will restrain exports and business investment. We recommend that you “GET SAFE and STAY SAFE” in 2012. Ask us about the guarantees that we can build into your Retirement Blueprint. "While the (Canadian) economy had more momentum than anticipated in the second half of 2011, the pace of growth going forward is expected to be more modest than previously envisioned," the bank's policy council, headed by governor Mark Carney, reported. Economists said the tone of the report likely means the bank won't move to raise interest rates until 2013, and the CIBC said it doesn't expect rates to rise until as late as 2014. The Canadian dollar rose 0.36 of a cent to 98.59 cents US after the announcement as investors assessed the odds of a rate hike in the near future had diminished, while the odds of a rate cut might have increased. Capital Economics economist David Madani said there was nothing in the statement that would make him alter his view the bank will halve its policy rate to 0.5 per cent sometime this spring. Carney also stated that house prices are likely to remain elevated, in part because low mortgages are making even high-priced homes affordable to many Canadians. Last week, the Bank of Montreal led a race to the bottom on interest rates by dropping its promotion fixed five-year mortgage to an ultra-low 2.99 per cent. As well, since the U.S. Federal Reserve has signalled it's on hold with an even lower interest rate setting, Carney would need to see robust economic activity in Canada to risk a rate increase that would have the effect of boosting the dollar. But the bank's mind is clearly focused on external risks, particularly Europe. It said it expects European leaders will be able to prevent credit contagion from spreading, but it warns the risks are increasing. "The recession in Europe is now expected to be deeper and longer than the bank had anticipated," it said. "The bank continues to assume that European authorities will implement sufficient measures to contain the crisis, although this assumption is clearly subject to downside risks." Elsewhere, the bank acknowledges U.S. growth has been stronger, but China is decelerating to more sustainable levels. The bank remains sanguine about inflation risks, although it said consumer price growth for this year will be slightly higher than it thought. Still, it judged: "Inflation expectations remain well-anchored." The World Bank, in a new forecast, also said Tuesday that it believes the global economy is braking, both within the emerging and developed economies. Global growth will average only 2.5 per cent this year, the institution said in a statement from Beijing, with the developed world crawling along at 1.4 per cent.
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