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July 2011 ... Bank of Canada may be on hold well into next year

Given the current state of the domestic economy and the recent hesitation demonstrated by the Bank of Canada (holding rates for the seventh consecutive time on July 20th), some analysts are now predicting rates to remain flat until 2012. It is believed that we will see accelerated economic growth in the short term; however, there will likely need to be more evidence before rates are increased. The revised July forecast now suggests that the Bank of Canada overnight rate will rise to 2.00% and that the 5-year Government of Canada Bond yield is expected to rise to 2.95% by the third quarter of 2012.

Consistent key factors continue to influence rate decisions


The Canadian economy is still experiencing a tightening of sorts without the presence of monetary policy. As was the case earlier in the year, several factors are contributing to the Bank of Canada’s decision to keep rates stable at the current level. Fiscal policy, currency strength (the loonie continues to trade above par with the US dollar), higher capital and liquidity requirements, high commodity prices, tighter mortgage lending rules and instability in global financial markets are all significant forms of tightening that must be considered. In addition to these factors, the Bank of Canada must be mindful of what’s happening in the US and the forecast for US interest rates. Experts feel the US Federal Reserve will keep rates on hold until the second half of 2012. This proves to be another constraint on when the Bank of Canada can recommence rate hikes given the impact on currency and the ensuing effects on growth and inflation.


What effect does this have on variable mortgage rates?


Experts believe that the Bank of Canada will continue to keep rates unchanged until later this year or perhaps even into 2012. However, this has not always been the general consensus. Last year economists were projecting a July 2011 rate increase. Given the likely deferral in rate hikes, Canadians can expect variable mortgage rates to remain stable for now as well. An increase might be in play when concerns over the sluggish US economy and global government debt levels have diminished, but only time will tell.




This article is for information purposes only. It is recommended that individuals consult with their Wealth Advisor before acting on any information contained in this article. We accept no liability whatsoever of any kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice.


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