Mortgage Rules Focus on Stability

By Chris Hamlyn - Nanaimo News Bulletin
Published: January 28, 2011 3:00 PM 
Updated: January 28, 2011 3:12 PM

Homeowners have to focus on the future and long-term stability when dealing with federal government changes to residential mortgages.

Beginning March 18, the maximum amortization period for government-backed insured mortgages is 30 years, down from 35 years, and the maximum amount Canadians can borrow in refinancing their mortgages is 85 per cent, down from 90 per cent.

On April 18, the government is withdrawing insurance backing on home equity lines of credit to ensure associated risks are managed by financial institutions and not taxpayers.

This follows April 2010 changes that included: borrowers meet the standards for a five-year fixed rate mortgage; a minimum down payment of 20 per cent on the purchase of rental property; and lowering refinancing maximums to 90 per cent from 95 per cent.

Kim Ross, a mortgage specialist with TD Canada Trust, said the 30-year amortization will require a higher monthly payment and a higher gross income to qualify but is offset by lower Canada Mortgage and Housing Corporation premiums, significant savings in interest over the amortization period and payout on a mortgage five years early.

She said looking at the big picture, the rule tightening is good for the average Canadian but they must think long-term.

“The average borrower is thinking their monthly payment is going to be higher. They’re looking at immediate ramifications,” she said. “The government is looking at the big picture, looking all the way to retirement.”

She said comparing 30-year amortization to 35-year, the difference in payments would likely be close to $100 where savings in interest could be in the thousands of dollars.

“For people who solely focus on the increase in payments, yes we need this tightening,” she said. “If one hundred dollars more a month is going to make or break buying a house, people need to rethink their situation.”

Cliff Moberg, past president of the Vancouver Island Real Estate Board, said he hasn’t noticed a great deal of public interest in the changes.

“The biggest thing we see from all of this is the reduction in amortization will make a difference to first-time buyers trying to qualify to get into a property,” he said. “It will probably shut out a percentage of first-time buyers, albeit a fairly minute number.

“Government didn’t increase the down payment requirement which would have had a huge impact.”

Ross said Canada has been conservative with its lending and these changes are a prime example of the efforts to slow the pace of household debt and keep Canadians from the issues facing the U.S.

The best advice for borrowers is to be informed.

“Do your homework, get pre-approved and know what your affordability is before you buy a house,” she said. “If you look at the average Canadian compared to 10 years ago, our debt ratio today is huge.”

Bankers sound alarm on loans

John Greenwood, Financial Post · Thursday, Dec. 9, 2010

Some of Canada’s top bank executives are growing increasingly uncomfortable with the level of debt Canadians are taking on through long-amortization mortgages.

“I think all of us are looking at [what to do],” said Ed Clark, chief executive of Toronto-Dominion Bank, adding the current situation “is not a good thing.”Speaking in an interview, Mr. Clark said TD has already acted to slow lending but it’s now up to the federal government to take steps such as reducing maximum amortization periods on home loans to 25 years from 35 years or lowering loan-to-value ratios.“These are exactly the things that government should be doing and there’s been a lot of discussion,” he said. Bank of Montreal CEO Bill Downe said his organization is also doing what it can to rein in customer borrowing, but fixing the problem without hurting the economy is “the challenge for Canada.”

“I think [tighter mortgage rules] is consistent with maintaining healthy consumer debt levels,” he said, suggesting the changes could be included in the next federal budget.

Meanwhile, the Bank of Canada is again raising the alarm about the perilous state of household finances. In the December issue of the Financial System Review released Thursday, it singled out elevated consumer debt as a “key risk” for the Canadian economy.

Fuelled by rock-bottom interest rates and a rising real estate market, Canadians have been borrowing at a rate much faster than their income has grown — especially over the last two years — raising concern that they are becoming vulnerable to economic shocks such as rising unemployment and stagnant wages.

For the first time, the value of mortgages outstanding — the biggest chunk of consumer debt — recently topped $1-trillion, according to Bank of Canada statistics.

A spokesman for Canadian Bankers Association declined to comment on whether it is lobbying the government for tougher regulations.

“Banks have contributed with their own economic research to the ongoing public discussion about household borrowing and debt levels in Canada, and there is broad agreement that this is a matter that merits close attention,” said Terry Campbell, vice-president of policy at the Canadian Bankers Association.

The banks first approached Ottawa asking for tighter lending rules at the start of the year. In February, Finance Minister Jim Flaherty gave them what they wanted, unveiling a list of changes to mortgage rules, including a requirement forcing all homebuyers to meet the standards for a five-year, fixed-rate loan even if they chose a variable mortgage with a shorter term. There were also rules lowering the maximum amount consumers could borrow against their homes to 90% from 95%.

The trouble was consumers barely noticed as the spending spree went on largely unabated. According Moody’s Investors Service Inc., household debt levels relative to income are following a similar trajectory as in the United States during the credit bubble.

Bank officials argue it’s unfair to compare the two countries because mortgage lending standards have always been much tougher in this country and there was never a major subprime mortgage sector.

Nevertheless, requirements did get loosened in the bubble years when the government allowed the amortization period on mortgages rise to 40 years.

“Originally, we said moving from 25 years to 40 years was a mistake,” Mr. Clark said. “We didn’t think it was a good idea. [When the crisis hit] the government moved back from 40 to 35 and I think from a public policy view, over the long run, it would better to get back to 25.”

He said it’s the responsibility of the government and not the banks to tighten the rules because it’s the government that regulates the market.

“If CMHC policy is 35-year [amortization], not 25 years it’s very hard for the industry to say, OK, let’s move to 25 years,” Mr. Clark said.

For his part, Mr. Downe said, he’s not trying to tell the Department of Finance what to do.

“I’m not prescriptive but I think those kinds of ideas [such as shortening amortizations] resonate,” he said in an interview earlier this week.

Moving to shorter amortizations would likely have a significant impact on the market. Statistics Canada finds 42% of all new mortgages are for amortization periods of more than 25 years.

Planning ahead key to getting top value when selling

KATE ROBERTSON

Special to Globe and Mail Update

Published Friday, Dec. 03, 2010 9:19AM EST

As with every exit strategy, experts advise owners to plan early if they think they will eventually sell their business.

According to the business monitor survey published for the first quarter of this year by the Canadian Institute of Chartered Accountants and Royal Bank of Canada, the top two challenges business owners believe they will face in selling are getting the right value for their company and finding the right successor.

Lawrence Wilder, a corporate lawyer with Cassels Brock, said that companies can get a start long before the actual sale date by staying on top of financial reporting and other bits of housekeeping.

“You certainly will get a better value if you have your ducks in a row than if you don't,” Mr. Wilder said.

Business owners who already have comprehensive financial and tax reports completed by third-party advisers will have a leg up on the due diligence process that eventually comes in an acquisition.

Once a business owner has decided to sell, he or she will have to hire an auditor, legal counsel, a business valuator (who does not take a commission on a sale) and, sometimes, a mergers and acquisition adviser (who does take a commission).

The team completes a company review, Mr. Wilder said. Everything from sales projections to employee and intellectual property agreements inform both the sales memorandum document that is used to market the company and the valuation of the business.

Some work with a business broker to market the company, but many owners want to maintain confidentiality during the process. Often, they rely on their adviser's networks to look for potential buyers.

“Most accounting firms have divisions that will assist in finding a buyer,” Mr. Wilder said. “They'll quietly market it around the street, and, very often, they won't name the company. They'll just say it has approximately x…revenues, and to please contact the accounting firm to get the name of the person who's selling.”

Interested buyers can then begin to negotiate the terms of the sale agreement to see if a deal can be made.

Even though the economy will have an effect on M&A activity, there are key factors every business owner should consider to maximize value when they sell, said Farley Cohen, a certified business valuator.

For one, it's important to have developed a business plan that goes beyond the owner's final day. said Mr. Cohen, chair of the board of the Canadian Institute of Chartered Business Valuators and a principal with Cohen, Hamilton, Steger & Co.

“The key thing to keep in mind is that value is prospective,” Mr. Cohen said. “It's looking into the future.”

Along with having comprehensive tax returns and financial statements that put the company in good standing, business owners must have answers for questions about how the company will continue to grow.

What assets and liabilities does the company have today and what are its prospects for the future? What is the value of the real estate and the equipment? How are sales expected to grow? Are there any unusual expenditures coming up?

Secondly, a business valuator will measure the internal risks of the company, which include how it is structured, how it is operated and by whom.

Whether or not a management team has a chief financial officer and a vice-president of sales and marketing will affect how much value he or she can ascribe to the company.

The valuator will also look at how competitive a business's pricing is, the level of customer satisfaction and a company's awareness of its competitors.

“You have to know what's going on in your industry and act accordingly,” Mr. Cohen said. “If there's new machinery that everybody's using, you should have that. I don't want to buy last year's way of doing things. I want to buy this year's – or, even better, next year's.”

Lastly, Mr. Cohen will look at the external risks to the business, which are largely outside of most owners’ control. But any owner would be wise to ask himself or herself the same questions a business valuator will be asking.

“It's sort of like a house,” Mr. Cohen said. “When you're selling your house, you'll look to find out what your neighbour sold their house for.”

Special to The Globe and Mail

Brokers agree BoC rate hikes unlikely until late 2011

Taken from Canadian Mortgage Broker News
Friday, 3 December 2010



A poll released by Reuters reveals that primary dealers and global forecasters unanimously agree the Bank of Canada will hold interest rates at its next policy announcement, but the timing of the next hike in 2011 is up for some debate.

The Reuters poll, released on Dec. 2 showed 93% median probability that the Bank of Canada will keep its key rate at 1% at its policy announcement on Dec. 7, with all 44 forecasters polled predicting no move.

Among the 42 that forecast the central bank’s next hike, the majority saw it happening in the first half. The median forecast for the May 31 policy date has the rate rising to 1.25%.

But among the 12 Canadian primary dealers — the institutions that deal directly with the central bank to help it carry out monetary policy — the majority forecast rate hikes in the second half with a median prediction of a first hike in July.

When compared with a similar poll taken in October, the more recent survey showed rate hike forecasts had been moved deeper into 2011.

Thirty of the 44 forecasters surveyed say the central bank will still be at 1 percent after March 1, a more pessimistic view than the last poll.

Martin Marshall, Ontario Sales Manager with Homeguard Funding Ltd. (Verico) is firmly on side with the Canadian forecasters and thinks continued low rates could be a boon for brokers.

“The economy has still not fully recovered from the recession, both here in North America and in Europe,” he says. “To raise rates at this time would be premature and therefore I do not see rates rising until the second half of 2011,” he said.

“This is great news for prospective home buyers and even existing home owners. Rates are at historic lows and we may never see them this low again.”

Morgan Vaughan, a mortgage broker with The Mortgage Group Ontario sees a steady stream of business for brokers in 2011.

“With recent numbers coming out, I don’t see any reason to raise interest rates and I believe it means brokers will continue to be busy next year, especially with refinancing.

“The spring real estate market will be strong and even if there’s a one per cent increase in interest rates I don’t see it affecting too many people because of the recent changes that require buyers qualify for the five-year posted rate.”

“Given that the Bank of Canada had indicated that they didn’t want to see that great a divergence with U.S. rates and the Fed was actually doing quantitative easing, it made sense to push out the Canadian rate hike as well as opposed to adamantly defending a Q1 move,” David Watt, senior fixed income and currency strategist at RBC Capital Markets told Reuters.

“We’ve had a lot of recovery and we’re seeing some fade at the present time, so you get that caution that maybe the domestic side of the economy is not strong enough to offset the still sizable trade hit and currency strength.”

A report earlier this week from Statistics Canada showed the economy disappointed in the third quarter with the weakest growth rate in a year, while the economy shrank outright in September, adding pressure on policy makers to safeguard the patchy recovery.
Bank of Canada Governor Mark Carney in October gave a blunt assessment of the global and Canadian economic recoveries, saying the central bank would plot its next move with extreme caution.

According to CIBC World Markets senior economist Benjamin Tal at the recent CAAMP Forum, massive new monetary stimulus by the U.S. Federal Reserve to support a sagging U.S. economy also prolongs low rates south of the border, and Canada is seen not wanting to race too far ahead of its largest trading partner.

– John Tenpenny, Editor, CMP

Bank of Canada raises rates, but sees soft recovery

Hike will be noticed immediately by those who have variable mortgages, lines of credit

By Fiona Anderson, Vancouver Sun September 9, 2010

The Bank of Canada raised its benchmark lending rate Wednesday, the third increase in just over three months.

The bump of 25 basis points brings the bank's target rate for overnight loans between financial institutions to one per cent. Canada's largest banks followed suit by raising their prime lending rate to three per cent.

The increase in prime lending rates will be noticed immediately by anyone with loans -- like variable mortgage rates or lines of credit -- that calculate interest according to the prime rate.

People with big lines of credit "are the people who are going to hurt," said Andrey Pavlov, associate professor of finance at Simon Fraser University.

But that's what the Bank of Canada was thinking when it raised the overnight rate, he said. The bank wants to slow consumption and it does that by hitting those who consume the most.

"Now they're not out there to hurt anyone in particular, but they do need to slow down the economy because if we grow too fast we're going to get inflation," Pavlov said.

But whether fixed mortgage rates will be affected is a different story. While the central bank has been raising its overnight rate since June, commercial banks have been lowering mortgage rates.

"So it doesn't necessarily mean that the fixed rate will go up," said Tsur Somerville, director of the centre for urban economics and real estate in the Sauder School of Business at the University of British Columbia.

"But it certainly means the variable-rate mortgages will go up [and] so by definition it has to dampen the housing market."

With the higher variable rate there will be some downward pressure on house prices, he said. But at the same time, the strengthening economy should have a positive effect on the market.

"And the strength of the economy is going to be a more important factor for the housing market," Somerville said.

Despite the rise in variable rates, and the uncertain effect on fixed-rate mortgages, Pavlov believes that variable-rate mortgages are still the way to go, especially since he believes this rate increase will be the last for some time to come.

"I wouldn't be surprised to see another year with no further increase," Pavlov said.

So although people who took out a variable-rate mortgage six months ago or a year ago now are paying a little bit more compared to a fixed-rate mortgage they could have taken out six months ago, they are still way ahead, he said.

"If [rates] do hold for another year you'll surely be ahead regardless of what happens afterwards because you're paying down your mortgage. You should be keeping your payments high; then even if interest rates go up they are going to be on a lower balance," Pavlov said.

But whether the Bank of Canada will hold rates steady or not is an open question. In its announcement, the central banker said economic activity in Canada had been softer than expected and that the economic recovery was now expected to be slightly more gradual than projected. But it also said "consumption growth is expected to remain solid and business investment to rise strongly."

As a result, "any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook," the bank said.

Douglas Porter, deputy chief economist at BMO Capital Markets, called the central bank's statement "a bit more hawkish than we expected."

"The Bank of Canada clearly retains its tightening bias, and seems generally unfazed by the recent cooling in the Canadian economy," Porter wrote in a note. "While we had been expecting the bank to now move to the sidelines for a spell, it appears that it will take a deeper slowdown in domestic spending ... than what we have seen so far to prompt them to stop raising rates."

Interest rates expected to edge up

Bank of Canada announcement at 9 a.m. ET

Last Updated: Monday, July 19, 2010 2:23 PM ET
CBC News

The Bank of Canada, weighing strong domestic growth against weakness internationally, will likely raise its key lending rate by another quarter of a percentage point Tuesday morning, economists say.

That would bring the central bank's overnight lending rate to 0.75 per cent.Bank of Canada governor Mark Carney is shown during a panel discussion last month at the International Economic Forum of the Americas in Montreal. (Graham Hughes/Canadian Press)
Increases in the overnight lending rate generally lead directly to increases in lines of credit rates, variable-rate mortgages and other demand loans.

All 12 primary securities dealers expect the central bank to announce a quarter percentage point hike. A survey of 20 economists by Bloomberg found similar unanimity.

If that rate hike does materialize, it would be the second straight hike by the bank, which had left its benchmark lending rate at a rock-bottom 0.25 per cent for more than a year to provide a shot in the arm to a struggling economy.

Canada's central bank was the first in the G7 group of industrialized economies to raise interest rates since the global financial crisis began unfolding.

Canada's economy faring better than most
Recent data has shown the Canadian economy continuing to shake off the effects of the recent slowdown.

The most recent employment report issued showed that Canada created 93,200 jobs in June, far above economists' forecasts. The Canadian economy has now recouped almost all of the jobs lost in the recession.

The unemployment rate fell to 7.9 per cent — its lowest level in more than a year.

Bank of Canada surveys released last week suggest that Canadian businesses remain optimistic as far as sales and hiring are concerned.

"With solid employment growth powering consumers, and business investment now surging, Canada's domestic economy still looks solid," noted Bank of Montreal economist Benjamin Reitzes.

The international economic recovery has been more uncertain. Recent U.S. and European economic data, for instance, has been tentative at best.

Analysts say that weakness should be enough to keep the Bank of Canada from aggressively raising rates.

TD Bank economist Grant Bishop agrees that the central bank will hike by a quarter point Tuesday, but thinks the bank will underscore "the economic uncertainties in its communiqué, leaving an open door to a pause on rate hikes if conditions warrant."

A survey of 20 economists by Reuters finds that most expect the central bank's key lending rate will be at 1.25 per cent the end of the year, meaning that a couple of additional small rate hikes may be in the offing after Tuesday's, along with a pause or two.

Some experts see peril in call for higher interest rates

The Canadian Press

Date: Mon. Jul. 19 2010 8:09 PM ET

OTTAWA — Bank of Canada governor Mark Carney has seldom heard such unanimity about what he should do with interest rates at a time of economic uncertainty.

The consensus of 12 economists surveyed is that the governor will hike the policy rate by a quarter point for the second time in as many months Tuesday to 0.75 per cent, still an extremely low level.

It's the same verdict for the 11 private sector and academic analysts who made up the C.D. Howe Institute's monetary policy council this month -- all casting their vote for further rate increases. Four even called for a half-point jump to one per cent.

As well, the markets have priced in a quarter-point hike for weeks.

But a few bearish economists are urging Carney to ignore the dubious wisdom of crowds, warning of potential danger if he succumbs to the pressure to raise borrowing costs as the economy is starting to recover from recession.

"I don't believe the case for hiking rates is valid, and I think Canada will pay for this," says Carl Weinberg, chief economist with U.S.-based High Frequency Economics.

Higher interest rates drive the cost of borrowing higher, discouraging consumer spending and business investment that are key to economic growth. As well, Canada will open up a three-quarter point interest rate differential with the U.S., which will raise the value of the loonie and squeeze Canadian exports to the United States.

"You could push the economy back down into the hole again," Weinberg warns.

Brian Bethune of IHS Global Insight concurs, saying Carney's first mistake was to signal a leaning towards higher rates in April, then following through with the first rate hike in three years on June 1.

The result was that markets pushed up mortgage rates in the spring by a full point percentage point, helping to kill off the housing rally, which had been a key driver of Canadian growth.

Carney himself appeared to express some reticence last month, noting that the global recovery was uneven and in advanced economies, "heavily dependent" on government and central bank stimulus. He wrapped up by cautioning against counting on a second hike on July 20, as many had and still do.

"Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," he advised.

Since, almost all indicators have gone south. Along with the European debt worries is concern that the U.S. may be heading toward a double-dip recession. China has advised its growth will be more moderate going forward.

In Canada, the economy followed an extraordinary 6.1 per cent acceleration in the first quarter with a sudden thud in April -- no growth. Retail sales, housing, manufacturing and balance of trade have all turned negative.

The argument for further interest rate hikes, as expressed by the C.D. Howe panel, was that the need for so-called emergency-level rates had ceased and that financial-market indicators point to inflation above two per cent -- the central bank's target -- in the next few years.

Royal Bank chief economist Craig Wright, who is a member of the panel, said the bears are exaggerating the impact of modest rate increases from what are unsustainably low rates.

He points out that Canada had the best two months of job creation on record in April and June, when employment grew by 109,000 and 93,000 respectively.

"The crisis has eased, and in that environment the crisis setting for both interest rates and fiscal policy can be eased as well," he argued. "The Bank of Canada is not looking at inflation today, it's trying to extrapolate where it will be in 12 to 18 months and if we don't moderate growth, we will run into inflationary concerns."

Wright does agree with the bears that this is no time to be aggressively tightening policy.

But labour economist Erin Weir of the United Steelworkers says any increase, even a small one, is without basis.

While 372,000 new jobs were created during the past year as of June, 270,000 more people joined the labour force during that period, he notes. This explains why the unemployment rate remains relatively high at 7.9 per cent, two points higher than it was before the recession.

And Bethune calls inflation a bogeyman. It is currently a tame 1.4 per cent, and with the global economy braking, unlikely to rear its head any time soon.

Bethune suggests an almost psychological fear of low rates may be behind the push to raise them. He reflects back to the summer of 2008, a few months before the economy caved in, when the consensus was near unanimous that rates were still too low. The concern looks absurd now.

"They are discomfited, they get twitchy, their feet are jumping because rates are too low," he says of monetary economists.

"Even in the Fed (U.S.'s central bank), there was an emerging consensus early in 2010 that it would have to have an exit strategy and start implementing it within months ... and now look where we are." Last week, the Fed was considering further stimulus as it downgraded American's economic outlook.

Bethune says Carney should look past the temporary strong jobs numbers and already past first quarter growth, and instead focus on the weak U.S. recovery and the drag it is bound to have on Canada going forward.

"It would be hard for them (Bank of Canada) not to raise rates when there are so many people saying raise rates, but this is when the central bankers earn their money," he said.

Mark Carney’s balancing act: Need for higher rates vs. global risk

Published On Mon Jul 19 2010

Les Whittington

Ottawa Bureau OTTAWA-Forced into a high-risk balancing act by the sputtering world economy, the Bank of Canada is expected to continue with marginal increases in its trend-setting rate Tuesday. But the central bank will temper the decision with a strong note of caution.

Analysts expect Bank Governor Mark Carney to hike the key lending rate by 0.25 per cent to 0.75 per cent.

If so, it would be only the second increase since April 2009, when Carney dropped the overnight rate to a rock-bottom 0.25 per cent—and promised to keep it there for a year—to combat the recession.

He abandoned that strategy on June 1 when the rate was set at 0.50 per cent.

Higher Bank of Canada rates will result in increased borrowing costs for business, consumers and some homebuyers.

A gradual run-up in Canadian interest rates is warranted by the renewed strength of the Canadian economy in early 2010 and the need to head off any chance of runaway inflation as economic conditions brighten, economists say.

Having weathered the recession better than most industrialized countries, Canada has returned to a position of growth. While business conditions have weakened in the past few months, the economy experienced red-hot 6.1-per cent growth in the January-through-March period.

And the job situation is slowly improving. Most of the 300,000-plus jobs lost in the recession have been recouped even though a growing workforce has left unemployment at a still-high 7.9 per cent.

“Domestic conditions continue to argue powerfully for further rate increases,” TD Bank Financial Group said in an analysis of Carney’s options.

Under current conditions, the central bank is expected to gradually rachet up its key lending rate over the next six months to the 1.25-per cent range at the end 2010.

But Carney is likely to balance Tuesday’s decision with serious warnings about the uncertainties ahead, particularly the risky direction of the international economy and its potential impact on Canada.

The central bank has to walk a fine line, says TD Bank economist Eric Lascelles.

“It’s one of those very tricky situations where traditional economic analysis—and just looking at the forecasts—suggests ‘Yeah, sure, they should hike,’” he said. “Then suddenly you take into account all of these risks that are disproportionately skewed downwards and it’s a much tougher call.

“The strategy that the Bank of Canada probably employs is it sticks to the assumption that all is reasonably well as the forecasts suggest and continues to raise rates but stays on guard for surprises and keeps the market on guard for surprises.”

The major risks to the world economy are the shaky financial situation of European countries in the wake of the Greek debt crisis and the weak recovery in the U.S., which takes 75 per cent of Canada’s exports.

This picture is clouded by a less robust housing market in Canada, an impending decline in Ottawa’s stimulus spending and reluctance so far by Canadian companies to pick up the slack by increasing business investment.

“You can’t automatically assume that all will be well” with Canada’s economy, said Lascelles. “I think that growth is still the likely outcome but how strong will that growth be?”

United Steelworkers economist Erin Weir disagrees with the view that Carney should gradually tighten monetary policy.

He said inflation is still below the central bank’s 2-per cent target and, even if hiring is increasing, wages have been so flat that there is no threat of a wave of wage-driven price increases.

With the U.S. Federal Reserve Board keeping rates low to bolster the American business climate, higher rates in Canada could worsen the outlook. That’s because rising interest rates tend to increase demand for a currency as investors anticipate better returns, thus driving up the loonie on exchange markets. This in turn makes it harder for Canadian manufacturers to compete for sales south of the border.

“I don’t see any need to raise rates,” said Weir. “And I think the downside to raising them is that, especially in a context where the American Federal Reserve is holding steady, it will tend to push up the Canadian dollar, which is certainly a huge challenge for a lot of Canadian export industries that are struggling to try to recover.”

What to expect from Bank of Canada

Paul Vieira, Financial Post · Monday, Jul. 19, 2010

OTTAWA -- Bank of Canada governor Mark Carney returns to the spotlight this week as he unveils the central bank’s latest interest-rate decision -- another increase is expected -- and economic outlook. He’ll also appear before Ottawa journalists Thursday to offer his view in his own words on the outlook on the economy, and whether it is headed for a dreaded double-dip as some have feared. Here’s a rundown of the key things to watch for this week from the Bank of Canada.

What is likely to happen to rates?

The Bank of Canada is widely expected Tuesday to raise its benchmark interest rate by 25 basis points, to 0.75%, as Canadian economic data -- especially on the jobs front -- remain relatively robust. Core inflation, which removes volatile items, remains close to the central bank’s 2% target. And indications are Canada’s economic growth, the best by far among Group of Seven countries, is beginning to chip away at the spare capacity the recession created. In all, analysts argue there is no need for the central bank to keep its key policy rate at emergency-like levels.

There are those, led by academics who sit on the C.D. Howe Institute’s monetary policy council, who suggest a 50-basis-point hike is required in an effort to get the policy rate back to a sustainable level before inflationary pressure builds. Meanwhile, analysts such as Brian Bethune of IHS Global Insight believe the Bank of Canada should hold off on rate hikes due to the increased risk of a “synchronized slowdown” among industrialized economies -- notably the United States and Europe.

What the Bank of Canada statement is likely to say?

Expect the central bank statement to mimic the pattern followed when it last raised rates on June 1 -- namely, hawkish action followed by dovish language. This gives Mark Carney, the Bank of Canada, enough flexibility to keep markets guessing, plus allow him to shift gears on a moment’s notice should the global economy deteriorate.

“This hawkish action/dovish language tag-teaming will keep markets on their heels, with the effect that although the market will usually gravitate towards the belief that the next decision will be a hike, it will remain slightly queasy about this assumption, and distinctly uncomfortable about later prospects,” said Eric Lascelles, chief Canadian strategist at TD Securities.

Further, this statement will provide a sneak peak of the Bank of Canada’s latest economic outlook, to be published Thursday. It is possible the central bank scales back its growth forecasts for the Canadian economy, given the set of weak data emerging from the United States and elsewhere. Previously, the central bank expected 3.7% expansion this year and 3.1% in 2011. There should be little mention of the Canadian dollar, as it has traded at roughly the mid-US90¢ range over the past two months.

What about interest rates for the rest of 2010 and 12 months out?

This is where opinions differ sharply, and that is best illustrated in the latest recommendations from the C.D. Howe Institute’s monetary policy committee -- which sort of acts like a shadow central bank. Council members believe a series of overnight rate increases over the coming year are necessary, as the output gap narrows and an emergency approach become less appropriate. However, the pace at which rates increase is up for debate.

Some Bay Street economists on the council lean toward just two more rate hikes, at 25-basis-point apiece, for the remainder of 2010. One of those analysts, Avery Shenfeld of CIBC World Markets, said the central bank would hike its benchmark rate to 1.25% before it pauses for “at least” two quarters, as relatively low borrowing costs will be required as the global economy grapples with widespread budget cutting and weakening consumer demand.

Meanwhile, most of the academics on the C.D. Howe council envisage the central bank’s rate hitting 2% and above by the end of 2010, and as high as 3.75% in one-year’s time. These academics argue that current rapid growth in money supply and higher-than-expected inflation will force the central bank’s hand.

pvieira@nationalpost.com

Waiting on Bank of Canada

Of the 19 major economists in Canada, all 19 of them expect that the Bank of Canada will raise its lending rate by 1/4% tomorrow. Depending on how the statement reads, the hike could affect mortgage rates. If its tone is easy and safe there could be a drop in yields. A more confident tone could lead to a rise in yields. A drop would be good for mortgage rates, a rise, not so good.

Fingers crossed.