Bank of Canada raises central rate
One last increase expected in May
As widely expected, the Bank of Canada hiked its benchmark overnight lending rate by one-quarter of a percentage point to 4.0 per cent on April 26th. The trend-setting Bank rate, which is set one-quarter of a percentage point above the overnight lending rate, now stands at 4.25 per cent.
This was the sixth 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. At that time, and the Bank said the economy was running near full capacity. Since then, the Bank has said the economy is running full tilt and faces capacity constraints.
“In line with the Bank's outlook for the Canadian economy, some modest further increase in the policy interest rate may be required to keep aggregate supply and demand in balance and inflation on target over the medium term,” the Bank of Canada said in a statement.
“CREA anticipates that the Bank of Canada will raise interest rates again May,” said CREA Chief Economist Gregory Klump. “The Bank is then widely expected to hold rates steady for the rest of the year as it assesses 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 March 2006, the core rate of inflation stood at 1.7 per cent – below its midpoint. 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. Combined with another expected increase in Canada's Bank rate, the Canada-U.S. currency exchange rate will remain strong. A 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 expected to slow due in response to higher gasoline prices and interest rates together with anticipated weakening in consumer confidence and household expenditure. This suggests the five year conventional mortgage is also near its peak.”
At the end of April 2006, the conventional five-year conventional mortgage rate stood at 6.6 per cent. Stiff competition among mortgage lenders, however, continues to help borrowers negotiate discounts off the advertised rate.
“Higher mortgage rates and rising home prices 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. (CREA 25/04/2006)