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Bank of Canada raises central rate
Interest rates may have peaked
T
he Bank of Canada hiked its benchmark overnight lending rate by one-quarter of a percentage point to 4.25 per cent on May 24th. The trend-setting Bank rate, which is set one-quarter of a percentage point above the overnight lending rate, now stands at 4.5 per cent.
This is the seventh increase of 0.25 per cent since September 2005, when Canada's central bank began to raise the overnight lending rate for the first time in almost a year. Previous Bank of Canada press releases that accompanied overnight lending rate increases indicated that the economy was running full tilt and faced capacity constraints. In its latest press release, the Bank hinted it might keep interest rates steady when it next sets its overnight lending rate in July now that interest rates have reached the point where inflation will be kept under wraps.
“With today's increase, the target for the overnight rate is now at a level that is expected to keep the Canadian economy on the base-case path projected in the April Monetary Policy Report (MPR) and to return inflation to the two per cent target,” the Bank of Canada said in a statement.
“The latest interest rate hike and accompanying statement that further hikes may now be on hold were not completely unexpected,” said CREA Chief Economist Gregory Klump. “The Bank needs time to assess the delayed impact of recent interest rate increases on the economy.”
The core inflation rate is targeted by the Bank of Canada at between one and three per cent. In April 2006, the core rate of inflation stood at 1.6 per cent – below its midpoint, and its lowest level since the end of last year. While a spike in energy prices has pushed up overall inflation, it has so far failed to reignite inflation expectations or cause core inflation to accelerate because core inflation does not include volatile food and energy prices.
Analysts believe that short-term U.S. interest rates are close to their cyclical peak, with one more hike in July before further interest rate hikes there are put on hold. With Canada's Bank rate now expected to hold steady, the Canada-U.S. currency exchange rate is unlikely to rise beyond its current level. With the Canadian dollar now at its highest level in more than 25 years, the strong Canadian dollar will also help keep inflation under control.
“Bonds respond to expectations about inflation and economic growth, and mortgage rates track bond yields,” said Klump. “The economy is still expected to slow in response to higher gasoline prices and interest rates together with an anticipated weakening in consumer confidence and household expenditure. This suggests the five year conventional mortgage is also near its peak.”
When the bank rate was hiked on May 24 th , the conventional five-year conventional mortgage rate stood at 6.75 per cent. Stiff competition among mortgage lenders continues to help borrowers negotiate discounts off the advertised rates.
“Higher mortgage rates and further home price increases are expected to gradually cool resale housing activity in the second half of 2006 from the record levels we've seen in recent years, but not by much,” Klump added. Record level sales activity in the first quarter is expected to help lift MLS® residential transactions to a sixth annual record in 2006.
May 24, 2006 in Arranging Mortgage Financing | Permalink
