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Central bank holds steady on interest rate

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  • Sep 6th, 2007 3:39 pm
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Central bank holds steady on interest rate

HEATHER SCOFFIELD

Globe and Mail Update

September 5, 2007 at 9:21 AM EDT

Ottawa
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Or, direct from the source:

[QUOTE]FOR IMMEDIATE RELEASE
5 September 2007

CONTACT: Jeremy Harrison
613 782-8782

Bank of Canada keeps target for the overnight rate at 4 1/2 per cent

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 4 1/2 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 4 3/4 per cent.

Near-term prospects for economic growth outside North America appear to be slightly stronger than anticipated in the July Monetary Policy Report Update (MPRU), while near-term economic prospects for the United States are weaker than expected. It now seems likely that the adjustment in the U.S. residential housing sector will be more pronounced and protracted, exacerbated by recent developments in financial markets. On balance, this implies weaker demand for Canadian exports than had been expected at the time of the July MPRU.

In Canada, total and core CPI inflation in July, at 2.2 per cent and 2.3 per cent respectively, continued to be above the inflation target but generally in line with the Bank's expectations. The Canadian dollar has also largely traded in the range assumed in the July MPRU. At the same time, the pace of economic growth in the first half of this year was above the Bank's expectations. It now appears that the Canadian economy is operating further above its production potential than was estimated in July. Domestic demand remains robust, buoyed by a continuing strong labour market and higher-than-expected increases in home sales and prices. However, recent developments in financial markets have led to some tightening of credit conditions for Canadian borrowers, which should temper growth in domestic demand.

Against this background, the Bank judges that the current level of the target for the overnight rate is appropriate. However, there are significant upside and downside risks to the outlook for inflation. On the upside, there is a possibility that household demand in Canada could be stronger than anticipated, while on the downside the ongoing adjustment in the U.S. housing sector could be more severe and spill over to the U.S. economy more broadly. In addition, there is uncertainty about the extent and duration of the tightening of credit conditions in Canada and, hence, about the tempering effect this will have on growth in domestic demand.

The Bank will continue to closely monitor evolving economic and financial developments. A full update of the Bank's outlook for growth and inflation, including risks to the projection, will be set out in the Monetary Policy Report, to be published on 18 October 2007.

Information note:
The Bank of Canada's next scheduled date for announcing the overnight rate target is 16 October 2007.[/QUOTE]
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Jul 1, 2007
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Who wasn't expecting this?
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[quote="Hubster" post_id="5575063" time="1189004370" user_id="27360"]HEATHER SCOFFIELD

Globe and Mail Update

September 5, 2007 at 9:21 AM EDT

Ottawa
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skanji wrote:
Sep 5th, 2007 12:14 pm
does this mean interest rates will be going up in the not to distant future?
No. In an economic slump rates go down to encourage spending. Rates go up to curb inflation.
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skanji wrote:does this mean interest rates will be going up in the not to distant future?
About 2-3 months ago they were expected to raise rates another 0.25% this go around. They may be in a holding pattern for the moment but I wouldn't be suprised if they continued to tighten in the 2Q of 08.
Back for a limited engagement.
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I have an ego bet that rates will end the year higher than 4.25% ... gooooo BOC!!!
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grant wrote:
Sep 5th, 2007 12:48 pm
I have an ego bet that rates will end the year higher than 4.25% ... gooooo BOC!!!

Given that the current rate is 4.50% and there is no way in hell the Bank will cut rates between now and December - looks like you have won your bet!

does this mean interest rates will be going up in the not to distant future?
...yeah it does. Had their not been turmoil in the credit markets the Bank would have gone up another 25 bps in September. I still think they have one more hike up their sleeve, but they are going to wait it out to see how things in the credit markets develop. If things do start to improve - I think there's a 40% chance of a 25 bps hike come the new year. If things start to deteriorate I think there's a 40% chance the Bank will hold. The risk that they cut is probably only 20% and completely dependent on whether a recession in the US takes the canadian economy down with it.

Either way, for someone who is looking at mortgage rates - I think this suggests that taking a variable mortgage (with a 95 bps discount (at TD this leaves you at 5.30%) is the best move possible. For a VRM holder, the Bank of Canada would have to raise rates by another 50 bps for them to be worst off than if they took out a 5 yr fixed (on average the best you can get with these mortgages is about 5.70%.)
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Bullseye wrote:
Sep 5th, 2007 12:03 pm
Apparently you.

'Variable at 5.5% now, 5.75% starting in October (the month after the next rate hike) and 6% in early 2008 still beats paying 6% starting now and for the next 5 years.'

http://www.redflagdeals.com/forums/show ... thalo+rate

Sorry, couldn't resist. :lol:
Haha, I give you props on digging that up. My post was in favor of a variable interest rate mortgage because even after a couple more rate hikes it would still be a lower rate than fixing it in at that time.

After the last rate hike, when everyone was certain there would be another one in September, I was actually one of the few who held out hope (though I wasn't definite) that there would be no rate hike because anything can happen (and it did) between July and September.

That being said, "who wasn't expecting this" referred more to who wasn't expecting it for the past couple of weeks (when we all knew for certain the BoC would postpone their rate hikes).
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gomyone wrote:
Sep 5th, 2007 4:48 pm
Either way, for someone who is looking at mortgage rates - I think this suggests that taking a variable mortgage (with a 95 bps discount (at TD this leaves you at 5.30%) is the best move possible. For a VRM holder, the Bank of Canada would have to raise rates by another 50 bps for them to be worst off than if they took out a 5 yr fixed (on average the best you can get with these mortgages is about 5.70%.)
Of course, keep in mind that even if the prime rate does creep up next year (say 6.05 after discount), you've still got 4+ years for it to head back down, and come out ahead of locking in at 5.7x...

Exactly the situation I'm in, and I'm pretty much ready to pull the trigger on the VR.
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13inches wrote:
Sep 6th, 2007 9:23 am
Of course, keep in mind that even if the prime rate does creep up next year (say 6.05 after discount), you've still got 4+ years for it to head back down, and come out ahead of locking in at 5.7x...

Exactly the situation I'm in, and I'm pretty much ready to pull the trigger on the VR.
...you're absolute right - the prime rate is closer to its peak right now than its bottom (I'd say its actually about "neutral" in central bank-speak). That means there is a better chance for it going down in the next 4+ years than up (our economy would have to be even stronger than it is right now for the Bank to push rates up more than 25bps - and that isn't likely if Alberta is cooling off, manufacturing in Ontario is hurting and the US is flirting with recession). If you know this story - then you know that a VRM is the way to go right now!

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