July 17, 2008

The Bank of Canada has stayed on the sidelines and left Prime at 4.75%. With inflation fears from Energy & Food pricing being counteracted by a slowing economy and a US economy in major recession the BoC is handcuffed with little ability to move in either direction. Though some feel the US will come out of recession next year, our feeling is they will be in one for the next 18 - 24 months minimum, which will keep our rates down. Variable rate mortgage make the most sense in this environment of a low Prime rate and still fairly low fixed rates. If you are in a fixed rate it is very important that you have a review done as soon as possible to see whether making a break in your term is worthwhile...it likely is!

As always the best way to deal with this is to put a strategy in place designed for your needs and goals...

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Canada braced for headwinds, central bank says

HEATHER SCOFFIELD

Globe and Mail Update

July 17, 2008 at 10:37 AM EDT

Ottawa - Canada's economy will soldier on, with core inflation well under control and growth picking up gradually - despite the U.S. downturn, ongoing financial market turmoil, and the slowing global economy, the Bank of Canada said in its quarterly economic outlook.

Total inflation is expected to spike up to 4.1 per cent in the final quarter of this year because of soaring energy prices, the central bank reiterated, but that inflation won't be contagious, and core inflation is well in hand.

"Core inflation is projected to remain well contained and broadly in line with earlier expectations," the bank said in its surprisingly sanguine Monetary Policy Report Update that suggested interest rates will remain on hold for the time being.

Even with total inflation persisting far above 3 per cent for the entire next 12 months, core inflation - which excludes the most volatile prices such as energy and some food, but includes 82.7 per cent of purchases - will barely budge, inching higher to reach 2.0 per cent only in the second half of 2009, the bank said.

The projection flies in the face of the bank's own survey which shows that a sizable portion of Canadian companies plan to pass along higher input costs to their customers.

The central bank suggests this pass-through effect won't happen, partly because the Canadian public's inflation expectations are well anchored, and partly because supply is outpacing demand right now.

Core inflation will also stay muted because housing prices are no longer soaring, the bank said.

"Deceleration in the growth of housing prices largely offsets the expected acceleration of food prices," the report explained.

Total inflation will eventually taper off to meet the pace of core inflation in the second half of 2009.

Canada's economic growth has nowhere to go but up, the bank added. The drawdown on inventories that took a big bite out of economic growth in the first quarter is now over, and now the Canadian economy can resume its growth track.

After an unexpected contraction in the first quarter of the year, annualized growth in the second quarter likely rebounded to 0.8 per cent, and will steadily pick up speed over the next two years, the bank forecasted.

It expects a 1.3 per cent pace in the third quarter, a 1.8 per cent pace in the fourth quarter, followed by 2.8 per cent in the first half of 2009, and 3.2 per cent in the second half of 2009.

Even though global growth will slow in the second half of 2008, Canada will gain momentum because the domestic economy is benefiting from a massive injection of money coming from high commodities, the bank suggested.

Canadian exports will remain in bad shape, declining 1.1 per cent this year, in real terms, and will see no growth next year. But as the U.S. economy recovers, so will Canada's trade prospects.

The U.S. economy is expected to grow a modest 1.6 per cent this year, but that's much better than earlier Bank of Canada projections of 1.0 per cent for Canada's biggest trading partner.

Still, for Canada, the central bank sees a total of just 1 per cent growth this year- lower than its previous forecast of 1.4 per cent. The main culprits are a slow start to the year, and decelerating domestic demand. While it is expected to remain healthy, it is softer than previously expected - hampered by a moderation in the housing market and slower growth in household credit.

The bank's assessment of the Canadian and global economy made only oblique references to the turmoil that has gripped financial markets and American financial institutions this week, and thrown U.S. policy makers into a panic.

"Conditions in global financial markets continue to be unsettled," the report stated. "The ongoing re-intermediation of assets onto bank balance sheets and the de-leveraging of the financial system are expected to weigh on global credit markets for some time."

But Canada is still managing to side-step most of that carnage, the bank pointed out.

"Although credit conditions in Canada remain challenging, they are better in many respects than those in other major markets."

Corporate and household borrowers have seen their effective borrowing costs drop by about 75 basis points over the past year, the bank estimates. That's because the central bank has cut its own key interest rate by 150 basis points, and while half of those cuts were wiped out by increased global borrowing costs faced by Canadian financial institutions, the other half managed to trickle through.

Despite its relatively upbeat assessment of Canada's economic prospects, the bank recognized that its forecast could easily be undermined be large risks:

• domestic demand could surge because of the influx of oil money;

• inflation could take root more easily in Canada if potential growth is lower than the bank assumes; · global inflation may drive up costs of imports more than expected;

• commodity prices could tumble;

• the U.S. downturn could be worse than expected and hammer Canadian exports;

• financial markets could further hurt credit availability in Canada.