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Interest Rate Update

Blog by Patricia Houlihan - Personal Real Estate Corporation | July 20th, 2010

The mortgage broker in our office just sent me this so for those of you who haven't heard the news today:

Canada's central bank issues gloomy outlook as it raises trend-setting rate by quarter point

By Julian Beltrame, The Canadian Press

OTTAWA - The Bank of Canada has hiked its trendsetting interest rate a quarter point to 0.75 per cent, while issuing a more gloomy outlook for the economy and raising questions about where rates are headed next.

The second rate increase in as many months had been widely predicted by economists and markets, given Canada's strong first quarter advance and recent job creation record.

The move will likely have an impact on variable mortgages as the big commercial banks usually adjust their prime rates shortly after the Bank of Canada adjusts its key lending rates.

The central bank's move will raise some eye-brows among so-called bearish economists who had urged governor Mark Carney to keep interest rates steady if he believed the recovery was slowing.

They argued that raising rates at this time will only weaken growth by discouraging consumer spending and business investment, and adding upward pressure on the loonie to the detriment of manufacturers and exports.

In a statement accompanying the announcement, the central bank's governing council made clear that they did believe the economy's growth was slowing.

The council said growth will be two-tenths of a point lower both this year and next - at 3.5 per cent and 2.9 per cent respectively - than it had thought in April.

And it said rather than returning to full capacity in the spring of 2011, the economy won't be up to speed until the end of 2011, two full quarters later.

"This revision reflects a slightly weaker profile for global economic growth and more modest consumption in Canada," the bank said.

It also noted that housing activity has declined "markedly," and that while employment growth has resumed, "business investment appears to be held back by global uncertainties and has yet to recover from its sharp contraction during the recession."

The bank said economic activity in Canada was still being led by government and consumer spending.

As for the global economy, the bank said there was still much to be concerned about.

The recovery was proceeding but was not yet self-sustaining. The debt overhang on governments, banks and households, it said, will temper the pace of growth.

And while the policy response has reduced some of the risk stemming from Europe's sovereign debt crisis, that too will have an impact on the pace of global growth going forward. Meanwhile, the United States is seeing private demand pick up, but in an uneven way, it said.

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

The next scheduled interest rate announcement is Sept. 8.

The central bank's governing council did not expand on its reasoning for the rate hike other than to say it is consistent with achieving its two per cent inflation target, and noting that at 0.75 per cent, it considers monetary policy to be considerably stimulative.

It said inflation, the key responsibility for the central bank, is broadly in line with what it had expected and is expected to remain near the two per cent target throughout the next two and a half years.

Although growth will be slower in the next two years, the bank did lift its projection for 2012 to 2.2 per cent from the 1.9 per cent it had earlier forecast.

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