BoC may have to break interest rate promise
Alia McMullen, Financial Post   Published: Thursday, July 23, 2009
 
TORONTO -- The Canadian dollar hit a 10-month high Monday amid growing risk appetite and rising expectations that inflation will ultimately force the Bank of Canada to break its promise to keep interest rates on hold until mid-2010.
"The time for tightening is not yet at hand, but June 2010 seems too late," said Yanick Desnoyers, the assistant chief economist at National Bank Financial. "The day when the condition for the Bank's low-rate commitment is no longer met will probably come before then."
Mr. Desnoyers said the benchmark interest rate had been lowered to a record low of 0.25% to limit the damage of the recession and financial crisis. However, he said the rate was too low relative to core inflation, which stood at 1.9% in June, just one basis point below the bank's target rate.
The outlook for higher interest rates, whether they come sooner or after June next year, has helped support the Canadian dollar, which has increased by about 8% since the beginning of the month.
The loonie inched up US0.16¢ to US$92.50 Monday after reaching its highest level since October in intraday trade. The rise was boosted by an improvement in investor sentiment after new U.S. home sales surged by 11% in June and the three-month Libor rate, the benchmark borrowing rate banks generally charge each other, fell to a record low 0.496%.
The decline in Labour, which peaked at 4.82% in October, is a sign that credit pressures continue to ease. Commodity prices were also marginally higher amid expectations of an uptick in demand.
Aron Gampel, vice president and deputy chief economist at Scotia Capital, said the Canadian dollar has also strengthened against the greenback because many were concerned U.S. stimulus efforts would leave behind a problematic debt hangover. He said the loonie was likely on its way back to parity with the U.S. dollar.
With the Bank of Canada having declared that the recession is likely over, interest is beginning to turn to when interest rates will begin to rise. Some, such as Mr. Desnoyers, believe the Canadian recovery, bolstered by government stimulus, will push inflation up faster than expected, forcing the Bank of Canada to use its "get out of jail free card" and raise the benchmark policy rate before June 2010.
The central bank said it would keep interest rates on hold until June 2010 "conditional on the outlook for inflation".
Bond yields have risen in recent weeks and now reflect a 90% chance of an interest rate rise within nine months.
Others, such as Mr. Gampel, believe the central bank will keep interest rates on hold until mid next year, but embark on an aggressive tightening thereafter. However, he said the economy was at a turning point and the Bank of Canada's ultimate decision would depend on the speed of economic recovery.
"They could be looking at having to push interest rates up at a faster rate, and sooner, if the recovery takes on a greater scope going forward," Mr. Gampel said.
He said the recovery could well be on track to outpace expectations as businesses rebuild inventories, consumer spending picks up and fiscal stimulus kicks in.
However, he said evidence to date does not suggest the central bank will need to hike rates before June, particularly with a large amount of excess capacity in product and labour markets.

SURREY, BC – Crediting low interest rates and reductions in house prices, Fraser Valley REALTORS® had their fourth busiest June on record.

The Fraser Valley Real Estate Board’s Multiple Listing Service® (MLS®) processed 1,982 sales in June, an increase of 40 per cent compared to the 1,418 sales in June 2008 and 32 per cent higher than sales in May 2009. June’s numbers were comparable to sales achieved during the same month in 2006 and 2007 during the strongest real estate cycle in the Lower Mainland’s history.

“The combination of historically low interest rates and sellers reducing their asking prices has created greater affordability,” Board President Paul Penner said.

“Buyers are looking at monthly mortgage costs that are 20 to 25 per cent less than they were a year ago. For a home in Fraser Valley, that translates into hundreds of dollars a month in savings.”

A recent market poll conducted by the Board confirms that first-time homebuyers and people ‘buying-up’ are taking advantage of the current market conditions. The survey, looking at buying trends, was issued to Fraser Valley REALTORS® who completed a sale during the first two weeks of June. Results show that 32 per cent of buyers were first-time homebuyers and 22 per cent were buyers moving from an apartment or townhouse to a detached house.

Penner observed, “We’re essentially seeing two markets right now. Sellers have the advantage when it comes to more affordable homes, but buyers hold more sway with higher-end properties.”

The benchmark price measures the value of a ‘typical’ Fraser Valley home as determined by the MLSLink® Housing Price Index (HPI). The HPI benchmark price of a detached home in June was $471,788, a decrease of 8 per cent compared to June 2008 when it was $512,850 and a 1.3 per cent increase compared to May 2009 when it was $465,939.

The HPI benchmark price of Fraser Valley townhouses decreased 10.1 per cent from $335,090 in June 2008 to $301,103 in June 2009, and increased 0.9 per cent compared to May 2009 when it was $298,308. The benchmark price of apartments also decreased year-over-year by 9.6 per cent, going from $255,670 in June of last year to $231,014 in June 2009, and decreased 0.5 per cent compared to $232,170 in May 2009.

The Fraser Valley Board’s MLS® showed 9,300 active listings at the end of June, a decrease of 17.7 per cent compared to the 11,295 listings available in June of last year. It received 11.5 per cent fewer new listings in June, 2,863 compared to the 3,236 new listings received during the same month last year.

Mayor Gregor Robertson says council received plans from the man behind the design of the Woodward's development, "A really interesting proposal just came forward from a local architect and engineer that we're going to take a look at. I think it's worth pursuing. It could end up being a great solution to a problem that's been hard to solve for several years."

Robertson believes it could be a long term alternative to the bike lane on the Burrard Street Bridge, "It would be years in the making, we have to get approval from taxpayers to spend the money on it as a capital project and that would be on a referendum in an election in the future and there's a lot of work to be do on the details and seeing what it will cost and what the best design and way to build this is. There's lots of work to do yet but it's great to have an idea on the table."

He adds the bike lane trial starting July 13th is still necessary as an interim solution. The cost could be covered by sources outside the city as Robertson pushes for federal and provincial infrastructure funding.

According to the mayor, the bridge would be the first of its kind in North America and similar to London's Millenium bridge, "It has great sweeping curves to it but it's quite light and doesn't take up anywhere near the bulk of a big car bridge, so it's very elegant. I think it would be a great tourism boost."

If council decides to go ahead with the plan, it would open the process to all interested firms, not just Gregory Henriquez, the architect behind this idea.

"This is a nice idea but it's very expensive," says lone NPA councillor Suzanne Anton. She thinks the mayor is simply bending under the pressure to make things better, "We're much better off going with the proposal that's been around which is to widen the bridge and allow enough room for bikes, people, and cars and be done with it."

She thinks retrofitting the Burrard Bridge will be cheaper because the span already needs a $30 million dollar upgrade. She says the widening of the sidewalks would only add another 25 million.

News1130 wanted to know what you think - so we talked with cyclists riding around Vanier park about the idea to build a dedicated bike bridge. Many, like Jen, support the idea, "I'm a biker, I don't really want to own a car ever, I have never owned a car. I'm 25 and I probably could afford one but I'm all about the biking so I would say yes, go for it!  But is that going to mean an increase in taxes?"

Even more people we talked to don't like the price tag, "I think they can take the money and use it for something more worthwhile, it's a hell of a lot of money for just bicycles."