Ottawa –

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Inflation in Canada has moved further below the 2 per cent target, owing largely to significant excess supply in the economy and heightened competition in the retail sector. The path for inflation is now expected to be lower than previously anticipated for most of the projection period. The Bank expects inflation to return to the 2 per cent target in about two years, as the effects of retail competition dissipate and excess capacity is absorbed.

Global growth is expected to strengthen over the next two years, rising from 2.9 per cent in 2013 to 3.4 per cent in 2014 and 3.7 per cent in 2015. The United States will lead this acceleration, aided by diminishing fiscal drag, accommodative monetary policy and stronger household balance sheets. The improving U.S. outlook is affecting global bond, equity, and currency markets. Growth in other regions is evolving largely as projected in the Bank’s October Monetary Policy Report (MPR). Global trade growth plunged after 2011, but is poised to recover as global demand strengthens.

In Canada, growth improved in the second half of 2013. However, there have been few signs of the anticipated rebalancing towards exports and business investment. Stronger U.S. demand, as well as the recent depreciation of the Canadian dollar, should help to boost exports and, in turn, business confidence and investment. Meanwhile, recent data have been consistent with the Bank’s expectation of a soft landing in the housing market and a stabilization of household indebtedness relative to income.

Real GDP growth is projected to pick up from 1.8 per cent in 2013 to 2.5 per cent in both 2014 and 2015. This implies that the economy will return gradually to capacity over the next two years.

Although the fundamental drivers of growth and future inflation appear to be strengthening, inflation is expected to remain well below target for some time, and therefore the downside risks to inflation have grown in importance. At the same time, risks associated with elevated household imbalances have not materially changed. Weighing these considerations, the Bank judges that the balance of risks remains within the zone articulated in October, and therefore has decided to maintain the target for the overnight rate at 1 per cent. The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks.

Andrew Coyne: Canadians aren’t getting the whole story on the economy
Andrew Coyne | 13/09/13 | Last Updated: 13/09/13 8:54 PM ET
 
Here’s a headline you probably didn’t see: Canadians Have Never Been Richer. Or this one: Household Net Worth Rises To All-Time High. Or this: Canadians Are Twice As Wealthy, After Inflation, As They Were Twenty Years Ago.
No, the headline you did see was something like this: Canadian Household Debt-To-Income Ratio Hits Record High. Canadian Household Debt Climbs. Canadians Go Deeper Into Debt.
It’s not that the latter headlines aren’t true. In fact, the ratio of household debt to disposable income did reach an all-time high in the second quarter, at 165.6%, bettering the previous records that had themselves inspired a thousand heavy-breathing headlines.
It’s just that they’re not the whole story. Merely reporting how much debt we are carrying, even relative to disposable income, tells us little. Without knowing how much we have in the way of assets, we have a very incomplete picture.
Anyone who’s ever bought a house knows this. If you take out a $300,000 mortgage to buy a $500,000 house, your debt may have gone up, but your financial position is unchanged: it’s the difference between the two, your net worth, that counts.
True, taking on debt puts you at some risk. Even with a fixed mortgage, your net worth can rise or fall, depending on whether your house appreciates or depreciates in value. But you’d think you’d at least want to know what it was. If you had to depend on the media, you’d be out of luck. Your house could have doubled in value, and all you’d know is that you had $300,000 in debt.
It’s not that these numbers are hard to find. Statistics Canada reports them at the same time and on the same page as the figures on household debt. What do they show? They show that in addition to liabilities of about $1.75-trillion, Canadian households also had assets worth roughly $9-trillion — more than five times as much.
All told, Canadians’ net worth stood at $7.263-trillion, or $207,300 per capita. Adjusted for inflation, that’s a new record. A decade ago, it was less than $150,000 per capita, in 2012 dollars. A decade before that, it was less than $100,000. That’s right: over the last two decades, Canadians’ per capita net worth has more than doubled, after inflation. Bet you didn’t read that story.
Of course, even if your assets exceed your debts, you still have to make the payments. But here again, debt-to-income doesn’t tell the whole story. You also need to know what interest rate you’re paying on the debt: it’s the combination of the two that dictates how much you pay every month. These figures, too, are readily available: the Bank of Canada calculates a “housing affordability index,” measuring mortgage payments, principal and interest combined, against disposable income. What does it show? At a ratio of less than 26% (as of the first quarter of this year) it is lower than it has been at virtually any time over the last 30 years — half what it was in the early 1990s, a third of its level in the early 1980s. But no, you haven’t read that anywhere, either, have you?
I wish I could say this was unusual. But it’s more or less a constant. It isn’t just the well-known observation known as Easterbrook’s Law — “all economic news is bad” — which holds that any economic development is bad news for somebody, and will be reported as such, even if it’s good news for everyone else. It’s that the good news as often as not gets flat out ignored. It just seems more compelling, more concerned, more responsible, to report that everything is getting worse, even if the facts show that at least some things are getting better.
Elsewhere I’ve pointed out that, contrary to everything you’ve read lately, poverty is declining in Canada, median incomes are rising, while inequality is steady or even falling. Again: these figures are easily available. But the same applies to a range of other data. How many stories have you read about youth unemployment (“Canada’s Youth Face Job Crunch” ), now at 14%? How many told you that that is in fact rather lower than it’s been at most times in the last 40 years?
Of course it would be better if it were zero, but numbers only have meaning relative to some benchmark. Indeed, the reason we say 14% is bad is because it’s worse than the overall rate of 7% — or because it’s worse than it was a few years ago, at the height of the expansion. But it’s at least as significant that it is better than it was in almost any year in the four decades before that.
Another example: the Canadian Centre for Policy Alternatives has just put out a study on tuition fees and student debt. Spoiler alert: it shows both are rising, as they have been for several years. In fact, Canada now has the fifth-highest post-secondary tuition fees in the OECD. That’s worth knowing, and raises legitimate fears that it might reduce accessibility.
But wouldn’t it also be worth knowing whether it has in fact, reduced accessibility? And would you be surprised to learn that, in fact, rates of enrollment have been climbing throughout this period: that, from 2000 to 2010, while the population aged 18-21 increased by 12%, enrollment in post-secondary education increased by 38%?
Yes, I’m guessing you would.

Finance Minister Jim Flaherty said he isn’t planning new measures to restrain the country’s housing market because his past four rounds of action have already worked to avoid a bubble.

“So far, I’m satisfied that we have a balance in the real estate sector,” Flaherty told reporters in Wakefield, Quebec, at the start of a policy retreat with business leaders. “There are some bumps along the road in Toronto and Vancouver, in particular in the condo markets, but overall, I’m satisfied,”

Flaherty has warned consumers to avoid mortgages that could become unaffordable when borrowing costs rise, after Canadians took on record household debts relative to disposable income.

Flaherty said that “we have been watching the condo market and the housing market very closely for at least five years.” He also said that he does have “contingency plans” he can use if the need arises.

The Bank of Canada has identified household finances as the biggest risk to the domestic economy, while Governor Stephen Poloz has said there are recent signs of a “constructive evolution” in that area.

Flaherty today also reiterated his own commitment to pare the federal budget deficit and spoke out against the extraordinary monetary stimulus seen in the U.S. and Europe.

“We are going to balance the budget without doubt in 2015,” Flaherty said, adding that this will “put Canada in a position of strength” to react to any future global weakness

Finance Minister Jim Flaherty is dismissing fears about Canada’s housing market, saying the current slowdown is welcome news and that there is no need for further government intervention.

While some observers are expressing fears that a steep correction is underway that will bring down housing values and possibly affect bank credit ratings, Flaherty said Tuesday that he believes government mortgage tightening last July actually helped avert what could have turned into a housing bubble.

“I’m comfortable about where we are,” he said in a telephone interview from France where he announced new government financing for the construction of a visitor’s centre at the Vimy Ridge war memorial.

“I’m pleased in particular that the condo market in big cities has fallen back. I’m also pleased with some other moderation in new house construction and in demand for mortgages. I think these are healthy developments because I think we were beginning to see some indications of the beginning of a bubble.”

He called the recent slowdown “healthy” and at least in part a consequence of his decision to tighten mortgage rules last July.

A new Teranet house price report released Tuesday showed home price increases slipped to two per cent in April from 2.6 per cent in March. Analysts noted that was the weakest performance since the recession for April, traditionally a good month for sales and prices.

While home sales have fallen nationally, and starts are now in the 180,000 a year range, well down from over 200,000 last year, home prices have stubbornly resisted that trend in most markets.

However, analysts note that prices are often the last indicator to kick in when a residential market falls, and some have speculated that prices could plunge by as much as 25 per cent, even further in the overheated Vancouver market.

The Office of Superintendent of Financial Institutions has told banks it is looking at their holdings of non-insured mortgages — those with at least 20 per cent equity — to determine the systemic risk should values plunge.

But Flaherty said he has no plans to further tighten government-backed mortgages for homebuyers with as little as a five per cent down payment. After tightening rules four times in the past four years, Flaherty said he has done enough.

“I’m not going to intervene in the mortgage market, I don’t need to,” he said.

OTTAWA — Tame inflation, combined with weak economic growth in this country and continuing global uncertainty, will likely keep interest rates at rock-bottom levels for some time to come.

Canada’s rate of inflation remained steady again in October, although slightly stronger than expected, with higher food and transportation prices offsetting a slower rise in energy costs.

Consumer prices rose 1.2% last month from the same time a year earlier, Statistics Canada said Friday. Core inflation — stripping out volatile items such as some food and energy products — was up 1.3% on an annual basis in October.

Both readings matched September’s price rises, but were less tame than economists had forecast. The consensus had been for overall inflation of 1.1% in October and a core increase of 1.2%.

That compares to an overall price rise of 1.2% in September and a core inflation pace of 1.3%.

The central bank’s monetary policy focuses on guiding inflation to a target of 2%, the midway point of its target range between 1% and 3%.

Overall inflation has not reached 2% since April. The highest level this year was 2.6% in February.

Bank governor Mark Carney and his policy team have left their trendsetting interest rate — the main monetary tool —at a near-record low 1% since September 2010. Most economists do not expect that rate to begin rising until at least mid-2013.

“Inflation continues to be a non-issue for the Canadian economy. Economic growth has slowed considerably this year, with data for the third quarter likely to decelerate from the first half of the year. This has translated into the slowing trend pace of inflation we have seen this year,” said Francis Fong, at TD Economics.

Friday’s report “is unlikely to give any impetus for the Bank of Canada to materially change its current lower-for-longer stance on monetary policy, which we expect to persist over the medium term.”

Robert Kavcic, an economist at BMO Capital Markets, said “a strong loonie and heightened retail competition have [also] worked to keep a firm lid on Canadian prices, leaving the Bank of Canada little to worry about on this front.”

In its Friday report, Statistics Canada said energy prices rose 1.7% in October from a year earlier, led lower by weaker gains for electricity and gasoline. That compares to a 2.9% annual increases in the previous month.

Electricity costs rose 1.7% last month, compared to an advance of 6% in September. “This smaller increase in the electricity index was the result of price declines recorded in Alberta,” the federal agency said. Prices in that province tend to be swing widely in line with market fluctuations.

Gas prices were up 4% year-over-year, down from a pace of 4.7% in September. Natural gas prices rose 11.6% in October from a year earlier, down from the 14.1% increase seen in the previous month.

Meanwhile, the increase in food prices accelerated in October, rising 2% from an annual pace of 1.6% in September. Gains last month were led by higher prices for meat and food purchased at restaurants.

Transportation costs were up 1.7% last month.

CMHC could be pulled out of mortgage insurance business, Flaherty says

Garry Marr  Apr 27, 2012 – 6:33 PM ET | Last Updated: Apr 27, 2012 7:33 PM ET

Finance Minister Jim Flaherty would consider taking Canada Mortgage Housing Corp. out of the mortgage default insurance business he told the National Post’s editorial board.

‘I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada’

“Over time, I don’t think it’s essential that a government financial institution provide mortgage insurance inCanada. I think what’s key is that mortgage insurance is available at a reasonable cost inCanada. I think there is a role to regulate but whether we, the Canadian people, have to be the owners and shareholders of a financial institution to do this is a question. I don’t think it’s essential in the long run.”

He offered no timetable on when the government could get out of mortgage default insurance business, just offering it up as a possibility. “We have a list of Crowns, Crown agencies that are being reviewed,” said Mr. Flaherty.

In a wide-ranging discussion on the housing market, he said he has no plans to increase CMHC’s current $600-billion loan limit, ruled out any possibility of regulating foreign real estate investment and made it clear his focus is on the governance of Crown corp. which controls about 75% of the mortgage default insurance business in the country.

“For some time now I’ve had concerns about the large commercial role that CMHC now plays. CMHC has become a significant Canadian financial institution. As you know, historically it was created with a mandate post-war to advance housing inCanada. It’s become much more that.”

Flaherty budget answers mortgage broker pleas

PHEW! Brokers are breathing a sigh of relief after the Finance Minister rejected calls to tinker with mortgage insurance rules, offering a budget that leaves the maximum amortization cap at 30 years and the minimum down payment at 5 per cent.

While moving to cut 19,200 bureaucratic jobs over the next three years with an eye to slashing $5 billion from the federal budget, Jim Flaherty left the current regime of mortgage rules in place.

The reprieve, at least for now, was anticipated by mortgage industry leaders from one end of the country to the next, and comes on the heels of broker lobbying efforts, spearheaded by CAAMP.

CEO Jim Murphy was in Ottawa for Wednesday`s budget focused on eradicating deficits by as early as 2015. He argued that the government listened to broker concerns about the importance of letting rule changes introduced over the last two years take effect, outside of the current extraordinary period of low interest rates.

“CAAMP’s overall message of not instituting changes that cause a housing downfall or that adversely affect job creation are being well received,” said Murphy. “In terms of mortgage insurance rule changes, given his announcement last week, I believe the Minister will continue to monitor … this does not prevent the government from acting in the future if they feel tightening is required.”

With the budget announcement, Flaherty effectively rejected a chorus of banker calls for a 25-year amortization cap, down from the 30 years the government now allows. Some economists also wanted the government to increase down payment requires to a minimum 7- or 10-per cent.

Both suggestions were billed as a way of cutting record levels of household debt and slow down the consumer rush to buy homes.

Exactly a week prior to Thursday’s communiqué, Flaherty used a media scrum to suggest he would resist calls for stricter rules.

“I find it a bit off that some of the bank executives are taking the position that the Minister of Finance or the government somehow should tell them how to run their business,” Jim Flaherty told reporters just outside Ottawa Thursday. “They decide what they want to charge in interest rates.

“The new housing market produces a lot of jobs in Canada so there’s a balance that needs to be addressed.”

Still, Murphy is anticipating the minister will eventually introduce some new rules to clamp down on mortgage growth.

“I’m expecting there to be legislation on covered bonds,” he told MortgageBrokerNews.ca. “This is a relatively new funding source in Canada and the question will be whether these products can be insured.

Finance Minister Jim Flaherty dismissed speculation about a Canadian housing bubble, telling reporters in New York on Wednesday that he sees no need to tighten the country’s mortgage rules further.

“We have seen in the past year some softening in the Canadian housing market, in part due to the tightening of the insured mortgage market rules that we did earlier this year … That’s an appropriate result from that tightening,” Flaherty said during a news conference. “It will take clear evidence of a bubble in the housing market in Canada, which we have not seen.”

Flaherty made those comments despite Royal LePage’s finding in its quarterly housing survey released on Wednesday that the average detached home price in Vancouver in the third quarter rose 17% on a year-over-year basis to more than $1 million. That’s three times the national average.

The soaring prices in Vancouver have largely been influenced by a flood of foreign money being invested into wealthy neighbourhoods like Richmond, Phil Soper, president and CEO of Royal LePage, said.

Asian investors, who are surrounded by some of the most inflated real estate markets in the world – especially in Hong Kong and Australia – typically see Vancouver’s prices as a bargain.

Soper said he believes the Vancouver market will likely soften next year because of slowing domestic demand, but the steady flow of foreign money into the city will likely reduce the amount of overall moderation.

“Vancouver is being influenced at the margin by foreign investment. I believe that that is a sustainable scenario,” he told CRE Online.

Foreign investors tend to purchase homes in Vancouver with cash. That means they are in no way influenced by the Bank of Canada’s interest rate policy. “So that investment will cushion the downside to the Vancouver market because most of those foreign buyers are purchasing with cash,” he said.

Article by Benjamin Tal, Deputy Chief Economist, CIBC World Markets 

Accidents can happen to any economy. Temporary troubles in energy and autos hit exports hard during the second quarter, which was enough to push Canada’s Gross Domestic Product (the size of our economy with inflation factored in) into a decline—even though demand was healthy at home. This made the quarter look worse than it really was, and a rebound is therefore likely in the third quarter. Indeed, June’s monthly data showed a decent 0.2% gain as a signpost of an upward trend. Aside from January’s strong growth, Canada’s GDP has been essentially flat for five months. Flat economies don’t inevitably signal a recession—both Canada and the US have gone through many

The Bank of Canada is no longer as worried about inflation

Until the global economy is on a more solid track, the Bank of Canada is being very patient in raising rates. It hinted at rate hikes for July and September, neither of which materialized. Now the Bank is no longer as worried that low interest rates will trigger inflation, and therefore the need to withdraw monetary stimulus has diminished.