Anticipation of Bank of Canada rate hikes are fuelling mortgage increases, high dollar
Anticipation of Bank of Canada rate hikes are fuelling mortgage increases, high dollarBY JULIAN BELTRAME, THE CANADIAN PRESS
OTTAWA — The Bank of Canada has yet to officially start hiking interests rates, but already Canadians are feeling the impact of higher borrowing costs.
Analysts say expectations the central bank will boost rates June 1 at the earliest and July 20 at the latest have boosted the Canadian loonie and pushed the big banks to twice raise mortgage rates in the past two weeks.
The loonie has been steadily gaining ground for weeks and Wednesday closed above parity, at 100.08 cents U.S., for the first time in almost two years.But economists warn there is danger in the Bank of Canada moving ahead of the U.S. Federal Reserve on hiking rates, even if it is justified by the fundamentals.
“The Bank of Canada is basically going to fly solo,” said Benjamin Tal, an economist with CIBC World Markets.“The markets are already discounting 75, maybe 100 basis points and it’s already in the price of the dollar.”
Canada’s economy has sprinted forward following last year’s recession to record a five per cent advance in the fourth quarter of 2009, and expectations are the first quarter will show an even quicker pace.
More importantly, Canada has recouped nearly half of the total job losses of the downturn, while the United States still struggles with the disappearance of 8.5 million jobs, a decimated housing market and a financial sector still hobbled by an excessive overhang of debt.
In testimony to Congress on Wednesday, Fed chair Ben Bernanke suggested it will be some time before the U.S. starts raising the policy rate from the current near-zero emergency stance.
“The Federal Open Market Committee has stated clearly that they currently anticipate that very low, extremely low rates will be needed for an extended period,” Bernanke told a Congressional committee.
Economists say moving ahead of the U.S. — which is all but certain — could have some beneficial effects, such as cooling what many believe is an overheated housing market by making mortgage costs higher.
But the bigger problem is that higher rates attract more foreign capital into Canada and gives an additional lift to the loonie, something few, except for possibly cross-border shoppers, want.
Finance Minister Jim Flaherty said Wednesday that the strong loonie is a reflection of the relative strength of the Canadian and U.S. economies.
While true, said Liberal critic John McCallum, a former bank economist, there is a risk in raising rates while the U.S. keeps theirs low.
“Then our dollar could get even stronger and that would be really bad for exports and jobs,” he said.
While some analysts have speculated that Canada’s manufacturing sector is no longer as exposed by a strong currency as a decade ago, few disagree with the notion that currency appreciation is a net negative for the economy.
This week’s trade numbers showed the rebound is almost all due to energy, while the goods side registered a $4.4 billion deficit in February.
Carl Weinberg of U.S.-based High Frequency Economists was not impressed.
“You might think that the largest supplier of crude oil to the United States would be able to run a bigger surplus,” said Weinberg. “Blame the strong loonie for a lot of the woes of exporters, especially since so much of what Canada sells is priced in U.S. dollars.”
Given the signals the bank has sent, it would take a major reversal in the recent spate of good economic news, as well as easing inflationary pressures, to stay the central bank’s hand on rates.
However, Sheryl King, chief economist with Merrill Lynch in Canada, says she does not believe governor Mark Carney will get too ahead of the curve and will keep the increases modest.
She says the economy may be hot now, but she sees it cooling in the second half of the year, and Carney putting on his brakes until the Fed shows signs of joining him on the policy tightening track.
Prince George Economic Outlook July 2009
Provided by Initiatives Prince George
The Bank of Canada released its quarterly
Monetary Policy Report1 this month,
providing an updated outlook for the
Canadian economy. In a projection that is
in line with recent forecasts from a variety
of other sources, the Bank expects that
economic growth will resume later this
year, globally and in Canada.
In the report, the Bank made reference to
signs that economic activity has begun to
expand in many countries, citing the
vigorous policy actions taken by monetary
and fiscal authorities around the world as
key factors contributing to the budding
recovery. However, while early policy
decisions reduced the likelihood of an
extreme negative outcome for the global
economy, the Bank emphasized that the
recovery is still in the emerging stages,
and that effective and resolute policy
implementation remains critical to
sustained economic recovery and future
global growth.
According to the Bank’s analysis, the
Canadian economy continued to contract
in the second quarter of 2009, although
the pace of decline moderated,
suggesting that a trough has been
reached; growth is expected to turn
positive in the third quarter. It is
projected that the 2.3% contraction in the
Canadian economy this year will be
followed by growth of 3.0% in 2010 and
1 http://www.bankofcanada.ca/en/mpr/pdf/2009/mpr230709.pdf
3.5% in 2011; comparatively, the global
economy is projected to decline by 1.7%
this year, then grow 2.3% in 2010 and
3.9% in 2011.
Factors underpinning the projected
Canadian recovery include monetary and
fiscal stimulus, improvements in global
financial conditions, the beginning of the
recovery in the global economy, and a
strengthening in the terms of trade. While
the higher Canadian dollar and the
restructuring of key industrial sectors are
moderating the pace of overall growth,
the Canadian economy is supported by
better financial conditions, firmer
commodity prices and higher levels of
business and consumer confidence than
anticipated, which has resulted in the
projection for a more immediate return to
positive growth.
Early signs of recovery identified in the
Bank’s report include the fact that the
housing sector appears to be reviving and
that financial conditions in Canada have
improved in line with recent global
developments, and continue to be more
favourable than in other advanced
economies.
Export volumes are expected to recover
over the projection period in response to
an improvement in external demand,
partly reflecting a rebound in US housing
activity as well as higher commodity
prices. These factors will be positive for
BC and it may be these factors, along
with the Olympics, that have influenced
the recent forecast from the Conference
Board of Canada that BC will record 3.3%
real GDP growth in 2010, the highest rate
in Canada.2 The Conference Board also
predicts BC’s retail sales, GDP per capita,
disposable income per capita and
employment rate to be above the national
average in 2010. A strong recovery in BC
will be important to strengthening
business and employment conditions in
Prince George more rapidly as the global
economic recovery continues.
Employment
Employment numbers in Prince George
improved for the third consecutive month
in June, with the number of employed
persons increasing by 1,100 (2.6%) from
the previous month. Provincially,
employment decreased by 0.2% monthover-
month, while the number of
employed persons in Canada remained
relatively unchanged. The Prince George
labour force continues to grow, increasing
by 1,200 persons in June; as the number
of unemployed persons remained
unchanged, the unemployment rate
decreased by 0.3% (to 11.3%). In
contrast, the number of unemployed
persons in BC and Canada increased by
7.8% and 2.8%, respectively, continuing
the trend from last month; unemployment
rates rose 0.5% provincially (to 8.1%)
and 0.2% nationally (to 8.6%). The city’s
employment rate increased 1.6% (to
65.3%), while rates declined by 0.2% in
BC and Canada.
Real Estate
565 properties worth $121 million
changed hands through MLS in the City of
Prince George in the first six months of
the year, compared to 693 properties
worth $153 million in the same period in
2008. At the end of June there were 814
properties of all types available on MLS
within the City limits, compared to 844 at
the end of June 2008. Residential sales
activity continued to be strong in June;
100 single family homes were sold in
Prince George, with an average price of
$223,085; unit sales are trending upward
but average home prices are fluctuating
each month, reflecting the variety of
types of properties being sold. At the end
of June, the year-to-date average price
for a single family home was $231,478,
just 4.6% lower than the same period in
2008; year-to-date unit sales are down
14.4%. Comparatively, year-to-date
average prices are down 5.3% and 2.5%,
respectively, in BC and Canada, and unit
sales are down 15.3% and 10.5% over
the same period last year.
Housing construction
There were 23 housing starts in Prince
George in June, down from 36 starts in
June 2008. Housing starts were also
down quite significantly compared to last
year in BC and Canada, declining 59.7%
and 36.3%, respectively, last month.
There were 40 residential housing units
completed in the city in June, up from 27
in the same month last year, and there
were 263 housing units under
construction (202 single family dwellings
and 61 multiple dwelling units); 10.8%
fewer than in June 2008.
Building Permits
The City of Prince George issued 71
building permits valued at $9.6 million in
June, up 61.3% compared to the same
month last year and bringing the year-todate
total to $28 million – down 36.6%
compared to the same period in 2008.
Residential permits, up 161% year-overyear,
were the main contributor to strong
values in June, accounting for 54.9% of
the total permits issued. Institutional
permits were also up significantly (118%)
compared to the same month last year.
Residential and Institutional permits are
still the main contributors to the overall
decline in year-to-date permits, down
43.0% and 82.2%, respectively.
Commercial permits, however, are up
11.6% compared to the first six months
of last year. Comparatively, despite
month-over-month increases in May,
permit values were down 57.9%
provincially and 24.8% nationally, yearover-
year. Year-to-date, permits were
down 51.2% and 27.9%, respectively.
Business Licenses
The City of Prince George issued 42 new
business licenses in June, 5 fewer than in
the same month last year. Existing license
renewals increased last month (31
compared to 3 in June 2008), and yearto-
date renewals were up 7.2% over the
same period last year. The total number
of business licenses issued year-to-date is
up 8.6% compared to the first six months
of 2008.
Airport Passenger Volumes
30,999 passengers passed through the
Prince George airport in June (15,397
inbound and 15,602 outbound), 10.7%
fewer than in June 2008. Year-to-date,
traffic through the airport has slowed by
14.6%, in line with declines elsewhere.
Comparatively, traffic through the
Vancouver airport was down 11.1%,
year-to-date, as of the end of May.
