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Rates Likely to Rise Sooner than Later

Canada's top central banker sounded a warning about inflation over the weekend, suggesting interest rates may not be on hold much past a spring federal election. Carney said that sustained growth from emerging economies means high commodity prices are expected to stick around for a long time. “Everything else being equal, higher commodity prices usually necessitate higher policy rates," Carney told a meeting of Western Hemisphere finance ministers.

35 Year Amortization Option Ending

The government has set March 18 as the last day for 35 year amortizations. Key points to be aware of:

1. Lenders will likely stop accepting applications for 35 year amortizations in advance of the March 18 cut off.
2. Approved deals that close after March 18 can still have 35 year amortizations as long as the deal is approved by CMHC/Genworth prior to the date (assuming the lender accepts the deal)
3. Longer term amortizations on conventional deals (greater than 20% down payment) will remain an option with many lenders. In fact 40 years is still available.
4. Porting/moving a mortgage to a new property upon sale of an existing property is not impacted as long as new money is not required. If new money is required then a blended amortization may be an option. However taking the new mortgage with a max 30 year amortization may also be required.
5. This change is great news. The biggest mistake the government made was extend amortizations from 25 years in the first place. Expect that in the future we will see it pulled back to 25 years.
6. Prices will adjust (slowely) to the new amortization. While not so much when supply is low and demand is high, but as we move to a more balanced or a buyer's market, prices will adjust. I don't believe this will happen until the full effect of the shorter amortization is implemented - likely the fall/winter 2011 market.

 

Here is the full announcement:

Release: Department of Finance tightens CMHC rules

 

• For the second time in twelve months, the Department of Finance tightened rules on residential mortgages to help slow the pace of household debt accumulation. Changes include shortening the amortization period to 30 years (which had already been shortened from 40 to 35 years in 2008), withdrawing CMHC insurance of home equity lines of credit (HELOC), and a reduction in the maximum refinance percentage from 90% loan-to-value to 85%. Changes to the amortization period and the refinancing ratio will take effect March 18 and the HELOC change will take effect April 18, 2011.

 

Key Implications

 

• The amortization change may alter the quarterly profile of housing market activity as some sales are pulled forward by households to pre-empt it. But the impact is not expected to be large, nor does it lead us to alter our annual forecast. Existing home sales were already forecast to weaken by about 8% compared to 2010, and prices to slip by a modest 1%. On aggregate, our calculations suggest that 20K sales (annually) may be impacted by the amortization change, with the average price likely to weaken a further percentage point. However, while the last few months of data represented upside risk to our December forecast, today’s measures put our forecast back on track.

 

• The other two changes are more likely to impact consumer durables and housing-related spending. Fro instance, household usage of HELOCs is mostly directed towards renovations, vehicle purchases, and debt consolidation. Yet, on that front as well, the impact is not expected to be large. Our macroeconomic forecasts already embedded a significant slowdown in household debt accumulation and consumer durable spending. The withdrawal of HELOC insurance may cause some substitution toward more traditional mortgages, but very few financial institutions insure their HELOC portfolios.  As such, the change is unlikely to register significantly on the aggregate lending scale. Moreover, less than a fifth of refinancing deals are high loan-to-value (LTV >80%), and lowering the LTV threshold to 85% likely impacts less than a tenth of refi loans through lower amounts and/or alternative vehicles. All said, aside from some distortion on the timing of some heavily credit-dependent activities, the policy changes do not alter our forecasts.

• In terms of monetary policy, this helps take some pressure off the Bank of Canada (BoC).  With all the talk about the non-sustainable pace of household debt accumulation, there was speculation about whether or not the BoC would consider hiking interest rates for reasons not directly related to its inflation-targeting mandate. Such speculation can be put to rest for the time being, and we can go back to focusing on the inflation outlook.

Interest Rates Rise Again Into 4% Range

Interest rates moved up to the 4% range again with the increased prices of bonds.

Rates Continue To Drop 3.89% base, 3.69% special (5YF)

The big 1% jump in rates in early April 2010 have all most entirely been wiped away. Fixed rate "specials" are being offered at 3.69% for a 5 year fixed with most lenders allowing 3.89% for rate holds and most deals.

Continued concerns about the global economic recovery have investors stashing money in the safety of Canadian bonds. While it is hard to say how long rates will stay in this range, these lower rates should help boost purchases in the upcoming fall real estate market.

An increase in inventory and slow sales have instilled a higher level of motivation in sellers than we have seen for a while. Combined with low rates should see buyers getting off the side lines and back into the market. While I personally don't expect further runaway prices, I do believe we will find ourselves in a balanced market for much of the fall with sales dropping off late fall into Nov/Dec.

Rates on down ward trend 4.25% (5YF)

Rates have reasonably quickly pulled back with the 5 year fixed approaching 4.25%. There continues to be a high level of uncertainty as to where rates will go from here but indicators are that we will see some further relief before they change directions. I expect the 4% range to be near the bottom for most lenders.

Fixed rates hit 4.69% a 1% jump in under 30 days!

Fixed rates have moved very quickly from their historic lows of 3.69% to 4.69% with Scotiabank. Most lenders are in the general range. While I expect these rates to come back down it is a reminder of just how fast they can change.

Mortgage Rule Changes For April 19 2010

The government of Canada announced a balanced change to mortgage rules. These changes will not impact most consumers but will reduce some of the riskier lending situations.

Summary of changes:

• All consumers must qualify on the 5 year fixed rate. This likely will be the discounted rate but avoids situations where approvals were granted for variable rates. Sadly this will still allow people ill advised or less educated to get themselves into trouble by going into a variable rate mortgage and then facing much higher payments when rates eventually jump up. Just because you qualify for an amount at today's ridiculously low 5 year fixed rate doesn't mean you can afford your mortgage when rates are 2% higher in a few years.
• Investors MUST put at least 20% down payment. This effectively wipes out the high ratio investment property programs. I never had clients take advantage of those programs as the premiums were very high and the properties would never produce cash flow. This is a very good thing in my opinion.
• Refinance to maximum of 90%. Previously you could refinance your property to 95%. In most situations where someone is refinancing to 95% it is because they are struggling with their cost of living relative to their income. In some cases it is short term due to an unexpected situation but more often is is poor spending habits. The new rule is a good thing as it allows for some deflation in values before the property is underwater and possibly enters foreclosure.

Impact of changes on the housing market?

I don't see how any of the above are going to have any kind of significant change on overall demand for housing. It will take a bit of demand off of the highest risk lending which is a very good thing. The 5 yr rate to qualify will help reduce future foreclosures by a modest amount. But none of the above take active buyers of today out of the market. The only way the housing market is going to slow down is by reducing demand.

More to come?

I would not be surprised to see a last minute additional change of reducing the max amortization from 35 to 30 years. I suspect it would be last minute to avoid a rush on beating the deadline. Because parliament is not in session, the changes can be passed yet and have to wait until then. I expect there to be more changes than just the 3 announced today. However the announcement today should be taken as notice that changes are coming.

5 Year Fixed Special - 3.69%

Fully featured but quick close (by late March). No rate holds.

Great rate special! 3.75% 5 Year fixed

Full featured mortgage. Must close by Feb 23. Some other restrictions apply.

Bank of Canada keeps overnight rate at 0.25% = Prime @ 2.25%

Once again, the Bank of Canada announced it would keep the key interest rate at a record-low 0.25 per cent to achieve its inflation target of two per cent.

While the Bank said economic growth in Canada resumed in the third quarter of 2009 and there has been a slightly higher than expected rate of inflation in recent months, it reiterated that the economy is still lagging, particularly due to factors like a strong Canadian dollar and low levels of U.S. demand.

December Greater Vancouver Real Estate Stats

Slow start, strong finish for housing market in 2009

After beginning the year at near record low sales levels, buyers’ confidence in the Greater Vancouver housing market quickly returned, allowing for significant and sustained increases in the number of residential property sales for much of 2009.

The Real Estate Board of Greater Vancouver (REBGV) reports that total unit sales of detached, attached and apartment properties in 2009 reached 35,669, a 44.8 per cent increase from the 24,626 unit sales recorded in 2008, but a 6.3 per cent decline from the 38,050 residential sales in 2007.

The number of homes listed for sale on the Multiple Listing Service® (MLS®) in Greater Vancouver declined 15.5 per cent in 2009 to 52,869 compared to the 62,561 properties listed in 2008.

“Low interest rates, an economy emerging from recession and continuing to improve, and consumer confidence led to the resurgence experienced in the Greater Vancouver housing market in 2009,” Scott Russell, REBGV president said. “Home sales neared or passed monthly records in Greater Vancouver throughout the latter half of 2009. In fact, last month’s home sales rank as the third highest selling December in the 90-year history of our organization.”

Residential property sales in Greater Vancouver totalled 2,515 in December 2009, an increase of 172.2 per cent from the 924 sales recorded in December 2008, and an 18.4 per cent decline compared to November 2009 when 3,083 home sales occurred. 

The residential benchmark price, as calculated by the MLSLink Housing Price Index®, for Greater Vancouver increased 16.2 per cent to $562,463 between Decembers 2008 and 2009.

New listings for detached, attached and apartment properties in Greater Vancouver totalled 2,153 in December 2009. This represents a 38.9 per cent increase compared to the 1,550 new units listed in December 2008 and a 41.1 per cent decline compared to November 2009 when 3,653 properties were listed.

“The number of homes listed for sale on our MLS® has been in decline in Greater Vancouver for eight of the last nine months, which results in upward pressure on home prices and less selection for buyers to choose from,” Russell said.

Total active listings in Greater Vancouver currently sit at 8,939, a decrease of 41 per cent from December 2008, and a decrease of 19 per cent from November 2009 (see graph on page two for more detail).

Sales of detached properties in December 2009 increased 159.2 per cent to 902, compared to 348 sales in December 2008. The benchmark price for detached properties increased 18.3 per cent to $766,816 compared to December 2008.

Sales of apartment properties in December 2009 increased 176.7 per cent to 1,154, compared to 417 sales in December 2008. The benchmark price of an apartment property increased 14.8 per cent since December 2008 to $382,573.

Attached property sales in December 2009 increased 188.7 per cent to 459, compared with the 159 sales in December 2008. The benchmark price of an attached unit increased 12.9 per cent between Decembers 2008 and 2009 to $478,093. 

Provided Real Estate Board of Greater Vancouver

Australia First Central Bank to Raise Rates - The outlook has changed

The Reserve Bank of Australia is the first central bank to raise rates. This one single event should cause a major mental shift for a lot of bond speculators. The end result is that fixed rates are likely at or very near the bottom.

The Australian and Canadian economies are very similar however our #1 trading partners are different. So the immediate impact on Canada is not huge it is a strong signal that prime will not stay where it as long as originally suggested by the Bank of Canada. That will put more focus on inflation arriving sooner than later and thus decrease bond values increasing bond yields which will result in higher rates.

However as this other article points out (http://www.theglobeandmail.com/globe-investor/first-rate-hike-boosts-stocks-loonie/article1313354/)

“However, one should not entirely jump the gun on the expectation that all major central banks will be following the RBA in short order as Australia presents something of a special case,” Mr. Tihanyi said in a note to clients.

Unlike the other major industrialized countries, “Australia never actually had a technical recession. They had one quarter of negative growth, and that was two or three quarters ago,” he said in an interview.

“They are kind of piggy-backing off the China growth story,” he added.

Bonds closed a bit higher today which just took them back to where they were mid last week.

Barring any big negative news around the globe, the writing is probably on the wall. Low fixed rates.. get them while you can.

Full article below

http://www.theglobeandmail.com/report-on-business/crash-and-recovery/australia-leads-with-rate-hike/article1313334/

Kevin Carmichael

Istanbul — Globe and Mail Update Last updated on Tuesday, Oct. 06, 2009 08:02AM EDT

The world's economic policy makers, apprehensive over whether an economic recovery is truly taking hold, received a shot of confidence Thursday courtesy of Australia's central bank.

Citing strong economic growth in Asia, where Australia sends the bulk of its exports, the Reserve Bank of Australia raised its benchmark lending rate a quarter point to 3.25 per cent, becoming the first central bank among the Group of 20 economic powers to lift borrowing costs cine the financial crisis began.

The decision will resonate beyond Australia.

Market economists, most of who were caught off guard by Reserve Bank of Australia Govern Glenn Stevens's policy shift, were watching for a major central bank to tighten lending conditions, saying that would be an early sign that a recovery from the deepest recession since the Second World War was truly afoot.

The Australian dollar rose to the highest in more than a year on the news, as Mr. Stevens revised his growth outlook for 2010 to “trend,” or an annual rate of more than 3 per cent – much faster than the 2 per cent forecast for Australia issued by the International Monetary Fund almost a week ago as officials from 186 countries began gathering in Turkey's financial capital for the annual meetings of the fund and the World Bank.

Mr. Stevens' confidence provides ballast for the general angst about the recovery expressed by Finance Minister Jim Flaherty, IMF managing director Dominique Strauss-Kahn and their counterparts among the leading economic policy makers over the past week.

Even as the IMF revised its outlook for global economic growth in 2010 to 3.1 per cent from an estimate of 2.5 per cent in July, the focus at these meetings has been on the downside risks to the rebound.

French Finance Minister Christine Lagarde, U.S. Treasury Secretary Timothy Geithner and others said the growth is almost entirely the result of hundreds of billions in government spending and rock-bottom interest rates, repeating again and again that persistent unemployment is a troubling sign.

Mr. Stevens acknowledged that economic growth in the major advanced economies would be “modest” due to the legacy of the financial crisis. However, Mr. Stevens said “very strong” growth in China would provide a boost for Australia and others in the region, and he expressed confidence in his fellow policy makers to keep stimulus in place until private demand returns.

“The global economy is resuming growth,” Mr. Stevens said in a statement published on the Reserve Bank of Australia's Web site. “With economic policy settings likely to remain expansionary for some time, the recovery will likely continue during 2010 and forecasts are being revised higher.”

Australia's interest-rate decision will have even greater resonance in Canada and other big commodity producers. The Reserve Bank of Australia's move was also based in part on expectations that Asian demand will keep commodity prices high, reinforcing the Bank of Canada's own outlook for energy, metals and agricultural prices.

While the economies of Australia and Canada share a lot in common, the comparisons aren't perfect. A notable difference is the health of their most important trading partners. Australia is benefiting from establishing close trade ties with China, the world's fastest-growing major economy. Canada's biggest trading partner, the U.S., is struggling to shake off the effects of the worst financial crisis since the Great Depression.

Still, economists couldn't help but speculate on which central bank would be the next to follow Australia's lead.

Analysts at RBC Capital Markets are putting their money on Norway's central bank as early as the end of the month, adding that the Australia decision could raise expectations in the market that the Bank of Canada and New Zealand's central bank will lift their benchmark rates earlier than expected.

“Now that the cycle of global loosening is broken, Norway will almost certainly be the next at the end of this month and attention will turn to Canada and New Zealand,” RBC economists said in a note to clients. “With other cyclical countries hiking, the (Bank of Canada) and the (Reserve Bank of New Zealand) commitments to keep rates unchanged till mid/late 2010 respectively may begin to look untenable.”

Fixed Rates Moving Up... again - Jun 11

As my variable rate clients know. Fixed rates moved from their published historical low of 3.79/3.89% (5 year fixed) to 3.99/4.09%. Yesterday most lenders moved again to between 4.19 and 4.49% due to increasing pressure on bond yields as a result of oversupply of bonds as governments flood the market to pay for all the stimulus programs and investors grow concerned about inflation.

If you are thinking of buying, give me a call to secure a rate of 3.99% only available until the end of the day today. Clients that have contacted me in the past and are actively looking have 3.79% rate hold in most cases because I grabbed it for them when it looked like rates were going to move. Just part of my commitment to always look out for my client's best interests.

Greg

Bond markets bet rate rises on the way

Exert from article below..

The Fed and the Bank of Canada have been very clear in their statements. The Bank of Canada has said it doesn't want to raise rates before mid-2010, and Dallas Federal Reserve Bank president Richard Fisher said last week that the Fed is leery about what would happen if it were to "withdraw too early."

"We just want to make sure we don't repeat the mistakes made in the 1930s and mistakes made by the others like the Japanese in the 1990s," Mr. Fisher said in a speech.

BOYD ERMAN

Original Article

From Wednesday's Globe and Mail, Thursday, Jun. 11, 2009 03:29AM EDT

The U.S. Federal Reserve and the Bank of Canada are telling anybody and everybody that interest rates are unlikely to rise any time soon, but the bond market isn't listening.

While central bankers reiterate time and again that rates need to stay low to counteract the global slump, faint economic rays of light in recent days have eager traders betting that borrowing costs in Canada and the United States are going to rise much sooner than anybody expected just a few weeks ago.

Markets are now pricing in a better than 50-50 chance that the Fed will raise rates by a quarter percentage point by year-end.

In Canada, where the Bank of Canada stated just last week that it plans to keep rates where they are until mid-2010, traders have nonetheless priced in similar odds that the central bank will drop that stance and move borrowing costs a quarter point higher by March.

An increase in central bank rates would have immediate ramifications for most everyone in North America, pushing up interest costs on lines of credit and floating-rate mortgages. Higher central bank rates would also raise bigger questions for the economic recovery because the slowing effect could snuff out any pickup in growth.

So who has it right? Most economists say the bond market is off base and while things are looking up, the economy isn't nearly strong enough to warrant higher rates.

"The Fed is going to wait until they are certain the economy is on stable footing before they start to raise rates," said Benjamin Reitzes, an economist at BMO Nesbitt Burns Inc. He doesn't foresee a Fed move until next year.

As for the Bank of Canada, its timetable will likely follow the Fed's because of the close ties between the two economies.

The Fed and the Bank of Canada have been very clear in their statements. The Bank of Canada has said it doesn't want to raise rates before mid-2010, and Dallas Federal Reserve Bank president Richard Fisher said last week that the Fed is leery about what would happen if it were to "withdraw too early."

"We just want to make sure we don't repeat the mistakes made in the 1930s and mistakes made by the others like the Japanese in the 1990s," Mr. Fisher said in a speech.

The catalyst for the bond market's expectations of higher rates is a fear of inflation, sparked by rising commodity prices and signs that economic growth may rebound faster than expected.

The concern is that once growth resumes, all the money that central banks have pumped into the economy will lead inflation to take off. Only a few months ago many more people were worried about deflation and even a reprise of the Depression.

The preoccupation with inflation is doubly strange when coupled with the amount of slack in the economy. Most factories and businesses across North America are running well below capacity, so they won't be raising prices any time soon. Many employers have cut wages and retailers are dropping prices to draw in consumers, both of which should also keep inflation under wraps.

All this means "rate hikes will be some time in coming," Andrew Balls, an executive at Pacific Investment Management Company LLC, the world's biggest bond fund manager, said in a report yesterday.

Once growth does resume in earnest, it will take more than a few months to sop up the excess capacity in the economy, giving central bankers plenty of time to react, Mr. Reitzes said.

"If they leave the stimulus in there a little longer than maybe they should, the risk isn't that great on the inflation front and they can just raise rates faster when the time comes," he said.

A couple are paying just 1p (2cents) a month on their mortgage after the Bank of England slashed interest rates

Article out of the UK in the Daily Telegraph. For once the consumer is winning against big business. While the stories in Canada aren't this attractive. I do have clients paying 1.3% on their mortgages right now. - Greg

Ben Cameron and his wife Nicola are being charged the nominal sum after signing up for an interest-only tracker deal in December 2007.

Their mortgage with Cheltenham & Gloucester tied their payments to 1.01 per cent below the base rate, which then stood at 5.5 per cent.

Since then it has fallen to 0.5 per cent, cutting their monthly bill from around £1,500 ($2,674) to zero.

But the couple from Hampton, south west London are being charged 1p because their building society's computers cannot deal with payments of nothing.

Their case highlights the tens of thousands of homeowners who have had their repayments slashed by the series of rate cuts imposed by the Bank in an attempt to stimulate lending. Interest rates have been reduced six times since October last year.

But while most people who took out tracker deals pegged below the base rate are still spending hundreds of pounds a month to pay off the capital on their homes, the Camerons' interest-only deal means they are enjoying a zero interest loan.

Mr Cameron, 37, an estate agent, said that they were keeping the money they have saved to put more equity in their home when their mortgage deal comes up for renewal. They had originally paid a 20 per cent deposit on the £400,000 property.

"We fell incredibly lucky, we almost didn't go for it," he told the Evening Standard. "We look at our mortgage statements now and they look ridiculous, it's fantastic." The couple are expecting their first baby in June.

Since rates began falling lenders have withdrawn all tracker deals that are tied below the base rate. The most attractive tracker mortgage currently on the market is 2.39 per cent above the Bank's rate.

'Banking crisis over' says CIBC economist

May 16, 2009 Julian Beltrame The Canadian Press  OTTAWA

The financial crisis that plunged the world into the worst recession in decades is showing signs of having righted itself.

A proclamation of the welcome development came at the same time that data showed the Canadian economy took another hard knock in March, with manufacturing sales falling 2.7 per cent, reversing a February pickup.

The cheerier harbinger is a steady reduction in global credit spreads -- the gaps between interest rates on low-risk government bonds and higher-yielding corporate and other debt -- which suggest that the financial meltdown is on course to being resolved.

"The banking crisis is over,'' declared the headline in a note yesterday from CIBC World Markets chief economist Avery Shenfeld.

"Nobody now expects there's another Lehman out there,'' Shenfeld wrote, referring to the mid-September collapse of U.S. investment bank Lehman Brothers, which jolted financial markets around the world.

"Nor will banks be pushed into a fire sale of assets that would depress valuations of like assets on other banks' balance sheets.''

The three-month London Interbank Offered Rate, a benchmark for lending between banks, was down 10 basis points on the week to 0.84 per cent, reducing bank funding costs.

Some base rates were the lowest since the U.S. subprime mortgage crisis erupted in the summer of 2007.

Pointing to narrowing credit spreads and improved interbank lending, Shenfeld said a turning point in the U.S. crisis was reached with the Obama administration's rescue measures.

Bank of Montreal economist Sal Guatieri said he also was encouraged by narrowing credit spreads.

"It means borrowing costs will be coming down for a wide range of borrowers, because a lot of variable-rate mortgages and a lot of personal and business loans are tied to the LIBOR rates,'' he said.

Guatieri cautioned that weakness remains in the economy and he is not ready to declare an all-clear until he sees improvement in job creation and housing, particularly in the United States.

Yesterday's data on Canadian manufacturing showed that the recovery will not be a "neat, straight-line'' move, noted economist Derek Holt of Scotia Capital.

The surprising 2.7 per cent tumble in factory sales in March left them down 23 per cent from their peak last July, despite a bounce in auto shipments following assembly-plant shutdowns in January and February.

The retreat was widespread, and with more auto sector retrenchment on stream, the manufacturing picture only looks bleaker down the road.

"Manufacturers are reining in production, but not as quickly as sales are plummeting,'' said Grant Bishop at TD Economics.

"Downward pressure on Canadian manufacturers will continue throughout the next two quarters.''

BoC Lowers Target Rate by 0.25%. Expects to stay until Mid 2010

As I predicted, Bank of Canada cuts rate by 0.25%. Says it is as low as it can go. "The target rate for overnight loans between commercial banks was reduced to 0.25 percent today, the lowest since the central bank was founded in 1934 and the lowest it can go, the bank said. Policy makers also kept the rate on overnight deposits from commercial banks at 0.25 percent, instead of the usual practice that would have reduced it to zero."

Prime Drops to 2.25%
Each of Bank of Montreal, Royal Bank of Canada, CIBC, TD and Scotiabank had moved to lower their prime rates - or what they charge their best customers - by 25 basis points, to 2.25%, effective Wednesday.

NOT TIME TO LOCK-IN YET BUT CLOSE
The surprising comments to me were that they may keep it this low until mid 2010. While not directly correlated, fixed rates are influenced so there should be more downward pressure on them. At this point I'm suspecting we will see fixed rates at this level for a while still and that it is not yet time to refinance if your goal is to catch the bottom. However wherever they get to in the next month or two will likely be the bottom so waiting longer just costs you more by continuing to pay a higher rate.

Further Reading
Read these articles on my blog.

Bank of Canada Announcement: Bank of Canada lowers overnight rate target by 1/4 percentage point to 1/4 per cent and, conditional on the inflation outlook, commits to hold current policy rate until the end of the second quarter of 2010

from Bloomberg... Canada’s economy will shrink by 3 percent this year, the central bank said, revising a January prediction of a 1.2 percent contraction. Next year, output will expand by 2.5 percent, instead of the earlier forecast of 3.8 percent. The bank said inflation will turn negative and reach a low point of minus 0.8 percent in the third quarter of this year.

“I have never seen the bank so easy-going about its mandate -- it’s quite something,” said Sebastien Lavoie, an economist with Laurentian Bank Securities in Montreal and a former Bank of Canada economist. Full Article


from the Globe and Mail... In January, Bank of Canada Governor Mark Carney was counting on multibillion-dollar stimulus programs pledged by governments in the Group of 20 major economies to reverse the effects of the financial crisis by the third quarter of this year. Those policies are taking longer roll out than policy makers anticipated, a delay that's exacerbating the downturn.

“The global recession has intensified and become more synchronous since the bank's January Monetary Policy Report Update with weaker-than-expected activity in all major economies,” the statement said. “While more aggressive monetary and fiscal policy actions are under way across the G20, measures to stabilize the global financial system have taken longer than expected to enact.” Full Article

from the National/Financial Post... Charmaine Buskas, senior economics strategist at TD Securities, was among those forecasting a rate cut, but she said the amount of detail in the announcement caught market participants off guard.

"What did come as a surprise ... was the astonishing transparency by the Bank as it explicitly stated that rates will remain at this level until June, 2010. This level of transparency is unprecedented but it speaks to the dire state of the economy and a desire to control expectations." Full Article

Bank of Canada to hold rate at record low until 2010 - National Post

National Post - Full Article

OTTAWA -- The Bank of Canada kicked off its foray into quantitative easing Tuesday by lowering its key benchmark rate by 25 basis points, to 0.25%, and committing to provide excess cash in the system on a daily basis in the hopes it will be lent out.

The central bank also took the unusual step of signalling that its record-low rate would remain as is until the end of June of next year based on its tepid inflation forecast.

Further, it has revised downward its outlook for the economy, forecasting a contraction of 3% for 2009, followed by growth of 2.5% next year. Previously it had indicated the economy would shrink 1.2% in 2009, followed by a robust 3.8% gain in 2010. The central bank does not envisage that core inflation will reach the desired 2% target until mid-2011.

"While more aggressive monetary and fiscal policy actions are underway across the [Group of 20 nations], measures to stabilize the global financial system have taken longer than expected to enact," the central bank said in its accompanying statement. "As a result, the recession in Canada will be deeper than anticipated."

The Bank of Canada's rate announcement, along with accompanying changes to its financial operations, lay the groundwork for the central bank to unveil Thursday further measures attached to its quantitative easing plan – which entails flooding financial markets with excess cash in an effort to lower lending rates and stimulate the economy.

Charmaine Buskas, senior economics strategist at TD Securities, was among those forecasting a rate cut, but she said the amount of detail in the announcement caught market participants off guard.

"What did come as a surprise ... was the astonishing transparency by the Bank as it explicitly stated that rates will remain at this level until June, 2010. This level of transparency is unprecedented but it speaks to the dire state of the economy and a desire to control expectations."

Shortly after the central bank's decision was announced, all of Canada's big chartered banks moved to lower their prime rates -- or what they charge their best customers -- by 25 basis points, to 2.25%, effective Wednesday.

Analysts feared another rate cut could disrupt the functioning of money markets. To mitigate any disruption, the central bank opted Tuesday to narrow its operating band to 25 basis points – which in effect means the interest it pays on chartered banks' deposits at the central bank will match its overnight rate. The central bank will continue to charge lenders 0.5% for loans.

Previously, the operating band was at 50 basis points – meaning it charged 25 basis points above the benchmark for loans, and paid 25 basis points below the benchmark for deposits.

Meanwhile, the central bank provided a glimpse of what may be contained in its easing framework. The Bank of Canada said it would be changing the terms of one of its current short-term facilities, from one- to three-month terms, to six- and 12-month terms. The rollover of existing stock into longer-terms, to begin next month, was necessary, it said, to keep the overnight rate at 0.25%.

Finally, and perhaps most important, the central bank said it would look to provide $3-billion a day in excess settlement balances in the system, to encourage competition among market participants that would, in turn, reinforce the 0.25% rate.

Ms. Buskas said the intent is to provide more liquidity than required, in the hope market participants will use it to lend. As a result, quantitative easing may have begun on a "philosophical" basis, she said, by creating extra cash in the system.

One of the goals of quantitative easing – which generally sees a central bank acquire a range of securities from market participants, without offsetting those costs on its balance sheet – is to lower rates across the yield curve.

Besides all the technical modifications, the central bank's statement also marked a sea-change, by providing "more explicit guidance than is usual regarding its future path so as to influence rates at longer maturities."

It added: "Conditional on the outlook for inflation, the [benchmark] rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target."

The Bank of Canada sets interest rates in an effort to get core inflation to the 2% level. In its statement, it said it expects core inflation – which strips out volatile elements such energy – to diminish through the year, and not return to target until the third quarter of 2011. "While the underlying macroeconomic risks to the projection are roughly balanced, the bank judges that ... the overall risks to its inflation projections are tilted slightly toward the downside."

As for the economy overall, it said it expects the recovery to be delayed until the fourth quarter of this year, and that the recovery would be "more gradual."

The economy is not expected to reach full potential until mid-2011, or roughly a year later than its previous forecast.

"Given significant restructuring in a number of sectors, potential growth has been revised down," the central bank said. "The recovery will be importantly supported by the bank's accommodative monetary stance."

Andrew Pyle, wealth advisor and markets commentator at ScotiaMcLeod, said the bank's downgrade to its economic forecast might be a bit harsh given recent encouraging signs, especially in the United States.

"The recovery itself is now seen has also being more gradual -- quite a contrast to the bank's earlier forecasts for ballistic growth in 2010. That outlook was too rosy then, and I believe Tuesday's gloomier call is also a bit overdone."

Surprised by depth of slump, central bank pegs rate at 0.25%-G&M

KEVIN CARMICHAEL

Globe and Mail Update

April 21, 2009 at 11:16 AM EDT

OTTAWA — The Bank of Canada cut its benchmark lending rate to the lowest possible, and promised to leave it there for as long as a year in order to fight a recession that is deeper and will last longer than previously thought.

The central bank on Tuesday dropped its key overnight target a quarter-percentage point to 0.25 per cent, which is “the effective lower bound” because anything deeper would disrupt short-term money markets, policy makers said in a statement.

In January, Bank of Canada Governor Mark Carney was counting on multibillion-dollar stimulus programs pledged by governments in the Group of 20 major economies to reverse the effects of the financial crisis by the third quarter of this year. Those policies are taking longer roll out than policy makers anticipated, a delay that's exacerbating the downturn.

“The global recession has intensified and become more synchronous since the bank's January Monetary Policy Report Update with weaker-than-expected activity in all major economies,” the statement said. “While more aggressive monetary and fiscal policy actions are under way across the G20, measures to stabilize the global financial system have taken longer than expected to enact.”

The central bank now predicts that Canada's gross domestic product will shrink by 3 per cent in 2009, compared with a January estimate for a 1.2-per-cent contraction.

The Bank of Canada also abandoned its relatively optimistic estimate that the economy would rebound to expand 3.8 per cent in 2010. The recovery will be far more muted, with an expansion of 2.5 per cent in 2010, the central bank said.

Mr. Carney and his chief advisers on the governing council are trying to restore confidence amid Canada's first recession since 1992. Employers have shed more than 270,000 jobs since the country fell into a recession in the fourth quarter, a period during which factories produced at only 75 per cent of their capacities, the lowest rate on record.

As troubling for the policy makers is an inflation rate that they said Tuesday will crater to an annual rate of negative 0.8 per cent in the third quarter.

The Bank of Canada is mandated by law to keep inflation advancing at a rate of about 2 per cent a year. That target won't be reached until the third quarter of 2011, the central bank said.

“Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target,” the statement said.

That commitment is unusual for Canada's central bank, which typically is more circumspect in order to retain a degree of command over investors.

With the target rate at a bottom, Mr. Carney is being forced to pull back the curtain so investors better understand the trajectory of monetary policy.

By pledging to keep the benchmark rate low for a long time, policy makers are telling investors that they can safely price mortgage rates, corporate debt and other credit assets based on the 0.25 per cent target.

Without that certainty, investors might have been reluctant to lower longer rates.

“The Bank of Canada doesn't guarantee that it won't raise rates for a year, but its implicit message is that it sees that risk as very low given current economic slack,” Avery Shenfeld, a senior economist at the CIBC World Markets, said in a note to clients.

Many analysts said before Tuesday's release that they thought Mr. Carney would leave the overnight target unchanged to avoid the technical headaches of adjusting a rate that was already so close to zero.

The overnight target is the rate at which the Bank of Canada encourages financial institutions to lend to each other at the end of the day when they settle their accounts.

Canada Cuts Rate to 0.25%, May Keep It There for Year-Bloomberg

Original Article: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aq2jzgak1WXE

By Greg Quinn

April 21 (Bloomberg) -- The Bank of Canada cut its key lending rate to a record low, and said it plans to leave it there for more than a year because inflation will remain below its 2 percent target.

The target rate for overnight loans between commercial banks was reduced to 0.25 percent today, the lowest since the central bank was founded in 1934 and the lowest it can go, the bank said. Policy makers also kept the rate on overnight deposits from commercial banks at 0.25 percent, instead of the usual practice that would have reduced it to zero.

“Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010,” the central bank said in a statement from Ottawa today. The central bank will provide updates at each future policy decision, starting June 4, on its commitment to leave the key rate unchanged.

The key rate has reached its “effective lower bound” during a deepening recession that will keep inflation below 2 percent until the third quarter of 2011, the bank said. Today is the first time since the central bank began publishing regular monetary policy reports in 1995 that it has said consumer prices won’t return to its goal within two years.

‘Appropriate Policy Stance’

The central bank said its rate cuts and promise to keep the benchmark rate at 0.25 percent are an “appropriate policy stance to move the economy back to full production capacity and to achieve the 2 percent inflation target.”

Policy makers said they still have “considerable flexibility” to spur growth, including so-called quantitative and credit easing. The bank will publish guidelines for those policies in two days. Governor Mark Carney has said their use is not “preordained.”

The Canadian dollar was little changed at C$1.2374 per U.S. dollar at 11:44 a.m. in Toronto, from C$1.2391 late yesterday. Earlier it depreciated by as much as 0.9 percent.

The yield on the Canadian government’s 10-year bond fell 1 basis point to 2.88 percent. The price of the 3.75 percent security due in June 2019 rose 8 cents to C$107.59.

“This statement is dovish in that it keeps it all on the table,” said Sacha Tihanyi, currency strategist in Toronto at Scotia Capital Inc., a unit of Canada’s third-biggest bank. “They are perfectly willing to undertake at least credit easing and possibly full-on quantitative easing.”

Updated Projections

Canada’s economy will shrink by 3 percent this year, the central bank said, revising a January prediction of a 1.2 percent contraction. Next year, output will expand by 2.5 percent, instead of the earlier forecast of 3.8 percent. The bank said inflation will turn negative and reach a low point of minus 0.8 percent in the third quarter of this year.

“I have never seen the bank so easy-going about its mandate -- it’s quite something,” said Sebastien Lavoie, an economist with Laurentian Bank Securities in Montreal and a former Bank of Canada economist.

The Bank of Canada today announced several steps to keep the financial system functioning with interest rates close to zero, which can disrupt the operations of money-market funds and banks.

The central bank said it will keep the benchmark rate close to 0.25 percent by leaving an excess C$3 billion in the system that settles overnight commercial bank payments, up from the usual C$25 million in settlement balances. The central bank will also conduct purchase and resale agreements each day at its target rate as needed.

Today is the first time the Bank of Canada hasn’t cut the bank deposit rate along with its overnight target rate since 1999, when the present interest-rate regime was created.

Credit More Expensive

Even with a record low overnight rate, the central bank’s April 13 survey of loan officers found those who said credit was more expensive outnumbered those who said it was cheaper by a record 80 percentage points.

The world’s eighth-largest economy probably contracted by 5.8 percent in the first three months of this year, the most since 1991, according to a separate Bloomberg economist survey. Consumer confidence is also being eroded because companies have fired more than 2 percent of the country’s workers since October -- a total of 356,600 -- the fastest reduction since 1982.

Companies from Finning International Inc., the world’s largest dealer of Caterpillar Inc. equipment, to Danier Leather Inc. have cut jobs after a plunge in prices for Canadian commodity exports has cut business and consumer spending.

Thirteen of 25 economists surveyed by Bloomberg News predicted no rate cut today, with the other 12 calling for a cut to 0.25 percent.

Did the Auto Industry take their strategy from Calvin and Hobbes?

Mortgage Tips

• If you’re looking for a pre-approval, be prepared to wait a few days longer than normal.  Refinances and spring home buying are boosting mortgage application volumes at various lenders. That’s forcing pre-approvals to the back burner since lenders deem them non-time-sensitive.
• There are ways to avoid foreclosure if you’re on the brink. This Bankrate story has some good advice. TD’s Kelly Hechler says": “Lenders will work with every customer to try and find a solution for their individual situation.”
• First-time homebuyers have two major ways to offset closing costs: 
  • The federal government's new $750 tax credit
  • Land transfer tax rebates…
    (Ontario rebate info, Toronto rebate Info, BC rebate info. Transfer tax is not applicable in Alberta, Saskatchewan, and certain other Canadian locales. For Quebec, contact your municipality.)

Mortgage Rate Trends

• BMO economist, Doug Porter, expects the Bank of Canada will cut rates again on April 21. (Hamilton Spectator)
• Credit market traders are betting on a 59% chance of a 1/4% rate cut by April 21.  They expect a 0% chance of rate increases by next January.  (CEP)  Traders trade on current economic information, which can change at any time. So use this at your own risk.
• “Over the past 6 months, a bubble of government bonds developed as investors sought refuge in the face of massive deleveraging...Low yields are not expected to be around for long, and will probably end badly, as have all other bubbles.” –- Assante Financial Planner, John Lunam  (Bond yields are closely linked to fixed mortgage rates.)

Budget 2009 - Real Estate Highlights

Yesterday’s federal budget was chock full of goodies for the real estate industry. Following are some highlights:

• A $5,000 increase to the RRSP Home Buyers’ Plan, meaning first-time homebuyers can now withdraw up to $25,000 from their RRSPs for a down payment – tax- and interest-free.
• A $750 tax credit for first-time homebuyers to help with closing costs, such as legal fees, disbursements and land transfer taxes.
• A 15% tax credit of up to $1,350 on eligible home renovation expenses undertaken before February 1, 2010.
• $300 million for ecoENERGY Retrofit grants.
• Up to $50 billion worth of additional mortgage buybacks. The government called this a “successful program” that “will reassure lenders that stable long-term financing will continue to be available”.
• More “disclosures” for mortgage insurance designed to “help consumers better understand the mortgage insurance transaction. The government will also propose new measures to ensure that Canadian consumers are charged no more for mortgage insurance than the true cost of obtaining that insurance.

Liberal Leader Michael Ignatieff said today his party will support the federal budget if the Harper government agrees to provide regular updates on the budget’s implementation and cost.

 

Ignatieff said his party will table an amendment to the budget today that will require the government to table reports in Parliament on the budget’s implementation and its cost – one in March, one in June and one in December.

 

If the Liberals aren’t satisfied with the government’s progress reports, they reserve the right to defeat the government, Ignatieff vowed. “We are putting this government on probation,” he said. “We will be watching them like hawks to make sure the investments Canadians need actually reach them.”

 

The NDP and Bloc Quebecois have said they will oppose the budget, meaning the Liberals must allow the budget to pass for the government to survive. The budget bill is automatically considered a matter of confidence in the government. – Financial Post

Where Prime Has Been

Here is a little history of what prime has been over the past number of years.

• January 2009 – 3.00%
• May 2008 – 4.75%
• May 2007 – 6.00%
• May 2006 – 5.75%
• May 2005 – 4.25%
• May 2004 – 3.75%
• May 2003 – 5.00%
• May 2002 – 6.25%

Mark Carney, the governor of the Bank of Canada, stressed Tuesday that Canadian consumer prices are not deflating and that the central bank’s sharp interest rate cuts would soon kick in to help heal the economy.

 

“I want to emphasize that this projected brief period of falling prices does not signal the onset of deflation for four reasons,” Carney said in a speech in Halifax. Firstly, he said, most prices aren’t falling, with more than half the goods in the consumer price index basket currently rising at more than the 2% target. He added this was because the steep drop in energy prices has dragged down the overall CPI index to 1.2%.

 

Secondly, he said, core prices should bottom at 1.1% in the fourth quarter of this year.

 

Thirdly, the central bank expects total inflation to begin to rise at the end of this year, reaching the 2% target by 2011.

 

And fourthly, well-anchored inflation expectations would help return actual inflation to the target. – Financial Post

Short-term stimulus will just repeat errors of the past

Another good article - Greg

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http://www.theglobeandmail.com/servlet/story/RTGAM.20090123.wcosimp24/BNStory/specialComment/home

JEFFREY SIMPSON

From Saturday's Globe and Mail

January 24, 2009 at 12:12 AM EST

If - and it is a large if - the Bank of Canada is correct, then Canadian governments are about to make a series of mistakes, perhaps starting with the Harper government's budget on Tuesday.

The bank, like every private economist, agrees that Canada is in recession, and will remain there for at least the first part of 2009. Even if the government did nothing, it would fall into deficit, perhaps in the range of $15-billion, because of lower revenues and higher spending on social programs in poor economic times.

The bank is remarkably upbeat about 2010. Growth, it forecasts, will be almost 4 per cent in 2010, with smooth sailing thereafter. In other words, the current economic downdraft will be nasty but short.

By contrast, governments are now rushing to plan multiyear, multibillion-dollar stimulus packages, most of the money from which will hit the economy - if the bank is correct - when it won't be much needed, in 2010 and beyond. No matter how fast the money from infrastructure projects - politicians' favourites - it can't really start flowing until mid-2009, even for "shovel ready" projects. Worse, some of these "shovel ready" projects are of the wrong kind.

Take the city of Ottawa, often a leader in bad government. Two weeks ago, city council published a list of "shovel ready" projects. Most of the big-ticket items were road enlargements and paving projects in the suburbs - exactly the wrong kind for an urban area that needs to intensify growth in the inner city and build even one rapid transit system.

Not all municipalities, thank heaven, are as lacking in imagination. Still, too many of the municipal projects are either the wrong kind or will inject additional spending into the economy at the wrong time.

Quite apart from the perils of wrong timing, a massive, hurried injection of additional money for short-term economic objectives is almost certainly going to work against long-term economic needs.

In judging any stimulus measures, we should ask: Will short-term measures designed to create short-term employment, viewed five or 10 years from now, have helped our economy become more productive and environmentally sustainable?

Every interest group and every provincial and municipal government has presented its shopping list of stimulus projects, many of which meet neither the test of competitiveness nor sustainability, let alone both. Some of the proposals, such as building suburban roads, would actually make us less competitive and environmentally sustainable.

Canada inflicted the wrong kind of stimulus on itself throughout the 1970s, the prolonged period of stagflation. Desperate to promote growth, Liberal governments punctured the tax system with incentives and added all kinds of new spending that set the stage for the long period of deficits that started in 1975.

Many of these short-term measures hurt long-term productivity and put the country on the long-term deficit track. Some of them, such as regionally sensitive unemployment insurance, remain policy today; others were only stopped or trimmed years later because, once enacted, they became entitlements protected by those who benefited from them.

To put matters another way, the old cliché "from crisis comes opportunity" could apply, but only if today's stimulus produces tomorrow's gains in competitiveness and sustainability. Otherwise, we'll wind up with the worst of all worlds: stimulus that won't make much difference in the short run but that acts as a drag on the future.

The very worst short-term measures, therefore, that the Harper government could introduce are the kind it has favoured for the past three years: itsy-bitsy spending programs directed in slices of the middle-class electorate and expensive tax cuts such as the two-point reduction in the GST.

In tough times, any tax relief or social spending should be targeted very precisely at the most vulnerable. And any adjustments in existing social programs should be targeted to them.

Money from broad-based tax cuts, as we saw in the first U.S. stimulus package under George Bush, will be saved or spent on products and services, some of which come from offshore. One-time tax credits or cuts, such as the Ralph Klein $200 rebates in Alberta, will do little for stimulus now and nothing for long-term competitiveness and sustainability.

Additional incentives for retro-fitting buildings might meet those tests. Money to build or upgrade public transit, plant more trees, improve waste-water treatment; or new investment vehicles such as Green Bonds or accelerated clean technology tax credits would also meet these tests.

If the Bank of Canada is right, Canadian governments are going to lumber themselves (read taxpayers) with too much debt in the next five years, wiping out many of the hard-won fiscal gains of the past decade for the sake of short-term and perhaps ineffectual stimulus. In so doing, they will repeat the errors of the past by passing on further burdens from today's citizens to tomorrow's.

American prescription an overdose in Canada

Interesting article (relative opinion I guess) in the Toronto Star. I guess it was interesting for me as it does a good job of bringing a bunch of my own similar thoughts and opinions together. I think the one point that is most important is that the world won't get out of this mess until the lenders start lending again. Unfortunately the only way that is going to happen is when the governments take over the bad debts, clean up the banks balance sheets and force them to lead. The term being used to describe this process is Nationalization. Might as well give the people an asset in exchange for assuming the risk in my opinion. At least it can be sold off later on. Much the way the Bank of Canada is buying up mortgages it has already insured and making a profit at the same time...


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http://www.thestar.com/Business/article/576540
Conditions here vastly different from those in the once spendthrift U.S.

David Olive

Business Columnist

As with all fads, we should be wary of the deficit chic that has turned the heads of even the most resolute deficit hawks. It will prompt the federal finance minister, Jim Flaherty, in his "stimulus" budget Tuesday to put Canada on the road to a $64 billion deficit over the next two years – surpassing the record $43 billion deficit of the early 1990s that Canadians sacrificed for years to eradicate.

And it's unlikely to accomplish much. The main reason for this, I suspect, is that Canada is not in an economic crisis at all.

We are buffeted by a worldwide financial crisis, in which global banks loaded with bad loans are in paralysis and simply cannot or will not lend. That's what triggered and has maintained the global economic misery. And none of the stimulus packages unveiled around the globe will have much if any impact without a drastic overhaul of a financial system that went haywire beginning in 2007 and plunged the world into recession – and is keeping us there.

One thing we know about government bids to kick-start an ailing economy: If, in the urgency of the hour, the money goes out too quickly, much of it is wasted on poorly thought-out projects and programs. And if instead wisdom prevails in the disbursements, necessitating some time and thought to ensure the funds are well spent, the money arrives long after the economy has recovered under its own steam.

Either way, the legacy is an enlarged national debt and debt-service payments; the prospect of "structural," or permanent, annual deficits – and the likelihood of runaway inflation, as all that additional spending drives up labour and other costs – the fate of Albertans this decade during the height of the oil-sands boom.

The prescription for what ails a once spendthrift U.S. now confronted with a Great Reckoning is not appropriate to Canada. Our U.S.-dominated media intake has convinced many of us that we completely share our neighbour's misery. Hence the popular belief that we need to weaken our own fiscal condition in emulating a U.S. stimulus package of unprecedented size and scope to be unveiled next month. Yet, conditions in the two nations are vastly different.

The Canadian employment level is expected to dip 1 per cent this year, with a loss of as many as 250,000 jobs. The U.S. is expected to lose roughly four million jobs in 2009, far higher on a per capita basis than Canada.

The Canadian housing market is comparatively stable, while it's expected that 13 per cent of Americans with mortgages will default and lose their properties to foreclosure this year. The Bank of Canada last Thursday projected robust GDP growth of 3.8 per cent next year, which would make this downturn of briefer duration than the last two, in 1981-82 and the early 1990s.

Most important, our banks are sound, while the largest U.S. and European lenders either are on government-provided life support or are widely expected soon to be in need of government rescue.

Global banks already have suffered about $1 trillion (U.S.) in writeoffs, mostly on U.S.-originated subprime, junk mortgages taken out by folks who had ample reason to wonder if they could make their monthly payments.

But there's another $1.2 trillion in so-called toxic waste hidden on the books of the world's largest banks, according to a recent Goldman Sachs report, that has yet to be accounted for and written off, further eroding, or wiping out, the capital reserves of those lenders in the absence of a government bailout. (A second or third bailout, in the case of the biggest troubled lenders.)

The toxic contagion is so widespread among America's thousands of lenders that the unlikeliest victims are emerging. Boston's giant State Street Corp., ostensibly a sleepy custodial bank, discovered early last week that, previous assurances to the contrary, it has several billion dollars in toxic assets that must be written off. It appears no bank is safe from grisly surprises.

The bottom line is that the world financial system remains non-functioning, despite drastic bailout activity beginning last year. As with State Street, whose shares plunged 56 per cent in value in one day last week, the likes of Citigroup Inc., Bank of America Corp., Royal Bank of Scotland PLC (Britain's largest lender), Switzerland's UBS AG (Europe's largest bank) and Italian banking giant Unicredito SpA cannot replenish their dwindling reserves by selling more shares because no investor will go near their radioactive stock.

Most global bankers thus will not lend. They've gone from acting as though risk did not exist, in the heady days of the U.S. housing and merger bubbles, to fearing even the most minimal risk in renewing loans to their most creditworthy clients. In order to shore up their reserves, and stave off illiquidity, they are hoarding rather than lending the hundreds of billions of dollars in bailout funds they've received from the U.S. and European governments.

And this is what keeps us mired in a global economic recession. Every chief financial officer of a major U.S. or European corporation – along with everyone else who deals with banks, from art galleries and orchestras to the millions of corner grocers and beauty salons – is understandably fretful of being turned away in attempting to renew financing for day-to-day operations, never mind expansion plans.

Many firms count themselves lucky to have renewed their bank financing at steeply higher rates. (You've noticed that the most layoff-prone Canadian firms are branch plants of foreign companies, whose fate is in the hands of troubled foreign banks.)

It doesn't help that alternate credit suppliers – hedge funds, private equity, venture capital, pension and other institutional investors – have gone into turtle mode.

The fact that banks now are additionally girding for the usual recessionary uptick in soured credit-card debt and car loans adds to the pressures on lending.

So, just as banks are hoarding rather than lending, employers as varied as Intel Corp., Sony Corp. and Microsoft Corp. – which on Thursday announced layoffs of 5,000 employees – have been engaging in pre-emptive, anticipatory layoffs in desperate bids to save cash and become self-financing until the global credit crisis is somehow resolved.

This in turn results not only in income loss for laid-off employees, but fear among remaining workers that their jobs will be the next to go. Naturally, both categories of Americans have closed their wallets.

With both U.S. business and consumers fearful of sudden loss of credit or income, all of the fiscal stimulus in the world won't lift the world economy out of its malaise. Recovery will happen only when global banks have been well and truly rescued and made to resume normal lending operations.

This will occur through short-term nationalization, or the Obama administration's suggested new "bad bank" to acquire all toxic assets from troubled banks, presumably accompanied by regulatory oversight to ensure the assisted lenders are back to conducting business as usual.

The red herring of stimulus packages is a distraction from the central front in the economic crisis – the need to purge the banking system and to force lenders, if necessary, to resume providing the credit that is the lifeblood of capitalism.

Good Article: Don't Let Doom and Gloom Get You Down

This was in the Vancouver Sun this weekend. I've highlighted and reprinted Three really important thoughts to take out of it:

1. Consumers, in making spending decisions, should avoid letting themselves get spooked by negative media reports, and focus instead on what's working (or not working, as the case may be) in their own lives.

2. During a recession  most of us emerge from it largely unscathed.

3. The psychology of recession becomes a self-fulfilling prophecy -- if we feel bad, things do indeed get worse. (Or if the paper keeps printing bad news!!)

 
Read the entire article below...

Don't Let Doom and Gloom Get You Down

By Daniel Drolet, Canwest News ServiceJanuary 17, 2009

Two news items crossed my desk recently that offered different views of the current economic situation.

One was a New York Times article analysing the 2008 Christmas shopping season in the United States. It talked of "the worst holiday shopping season in decades."

The same day, Moneris Solutions, Canada's largest processor of credit card and debit card transactions, announced that not only were Canadians spending more last month, but that some categories showed "dramatic growth" in spending.

Two countries, two different stories. Taken together, they point to an important thing to keep in mind in these recessionary times: Consumers, in making spending decisions, should avoid letting themselves get spooked by negative media reports, and focus instead on what's working (or not working, as the case may be) in their own lives.

We've been hit lately with a barrage of bad economic news, much of it originating in the U.S., where the economy is in bad shape. Housing prices are dropping, consumers are holding back, and retailers are struggling.

"A deep recession, severe winter weather and five fewer shopping days combined to create the most challenging sales environment in years for the nation's retailers," the U.S.-based National Retail Federation said.

It added that in the U.S., retail industry sales for December (which exclude automobiles, gas stations, and restaurants) declined by 2.2 per cent unadjusted over last year and by 1.4 per cent seasonally adjusted from November.

But the negative news has to be taken with a grain of salt. Just because you see it on CNN doesn't mean it's true here.

That's what Canadians realized during the 2008 Christmas season, when the reality was that most of us weren't hurting.

"Nationally, department stores saw the amount of money charged to credit and debit cards climb by nine per cent compared to the same time last year," Moneris said, adding that clothing stores saw six-per-cent growth in credit and debit card sales.

This week, the Conference Board of Canada said "the U.S.-led global recession has dragged the Canadian economy into recession in 2009." But that doesn't mean our economy will shut down. That's because, even in the worst of times, not everyone suffers.

It's bad in the U.S. right now. But despite the gloomy picture it paints of 2008 Christmas retail sales, the National Retail Federation also reported this week that in December, health and personal care stores in the U.S. saw unadjusted sales grow 7.6 per cent year over year. Also up, year over year, were sales in sporting goods, hobby, book and music stores.

If you get caught up in the psychology of recession, you can overlook the bright spots.

How we react to economic news may also depend on our age.

Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada, said in a recent blog post that about 40 per cent of Canada's workforce is too young to have experienced a recession during their working lives.

That means many Canadians don't have a basis for forming a personal impression of how severe a recession is -- "or the fact that most of us emerge from it largely unscathed."

Meanwhile, he said older Canadians, who have lived through tough times, may project past negative experiences onto current circumstances, "warranted or not."

"All of this could lead to an over-reaction -- a magnified fear of recession," Hodgson wrote.

"Confidence among consumers and investors is an important element in keeping the wheels of commerce moving, or in slowing them down.

"If we are confident in the economy as a whole, in our job prospects and in our ability to keep earning, we are likely to buy more, invest more and take long-term decisions in favour of more buying and more investment. This positive attitude creates upward momentum in the economy.

"If, however, consumers and investors are influenced by all the recession talk, adopt a more negative attitude and suffer a drop in confidence, then we are less likely to buy and invest and to take long-term decisions. We hunker down, retrench personal and investment spending in an effort to husband cash -- and end up making the overall economy even worse.

"The psychology of recession becomes a self-fulfilling prophecy -- if we feel bad, things do indeed get worse.

"The hyperbolic tone of recent news coverage and the recent stock market volatility are almost certainly causing consumers to overstate their concerns."

US Fed at Zero. What next?

Article in the Globe and Mail: Bernanke's Japanese edge

MARCUS GEE AND BRIAN MILNER

From Wednesday's Globe and Mail

December 16, 2008 at 10:53 PM EST

In 1999, an American economics professor by the name of Ben Bernanke addressed an issue that at the time was fascinating mainly to other economists: What do you do when you cut interest rates to the bone and nothing happens?

That was the problem facing Japan. Confronted with an economy that was down and refusing to get back up, the Bank of Japan (BOJ) had reduced rates nearly to zero, just as the U.S. Federal Reserve is doing now. Nothing happened.

What to do? Mr. Bernanke, a student of the Depression and of Japan's “lost decade” of the 1990s, grappled with the question in a paper.

“Having pushed monetary easing to its seeming limit, what more could the BOJ do? Isn't Japan stuck in what Keynes called a ‘liquidity trap'?”

To the contrary, he said, “there is much that the Bank of Japan could do to help promote economic recovery in Japan … a more expansionary monetary policy is needed.”

What he meant was a policy of “quantitative easing” – flooding the banking system with money with the aim of easing pressure on banks, persuading them to start lending again and prevent a downward spiral in prices.

That is precisely the policy that the Bank of Japan adopted from 2001 to 2006, becoming the only modern central bank to, in effect, print money while at the same time keeping rates at rock bottom.

Now, faced with a crisis of his own, Mr. Bernanke, as chairman of the Fed, appears to be embarking on a similar course – and no one is quite sure where it will lead.

When the Fed announced yesterday that it was cutting rates to between zero and 0.25 per cent, it noted that it was buying up mortgage-backed securities and was considering whether to buy long-term Treasury securities.

That was a strong signal that Mr. Bernanke is about to put his academic theories into practice, with trillions of dollars and the fate of the world economy at stake. Ever since a 2002 speech in Washington where he talked about what to do if deflation hit the United States, he has been musing about how central banks might pump money into a failing economy if interest rate cuts weren't working – then considered a remote possibility at best.

In that speech, which earned him the nickname “Helicopter Ben,” he referred to the remark by the renowned Chicago economist Milton Friedman that governments could theoretically just drop piles of money from helicopters. That helicopter drop is now on.

Since the crisis began, the Fed has moved aggressively to thaw frozen credit markets and get banks lending into the marketplace again.

Among other measures, Mr. Bernanke has turned to quantitative easing since mid-September, essentially printing billions upon billions of dollars and pumping them into the financial system – at a level far in excess of what's required to maintain the Fed's target interest rate for interbank borrowing.

The Fed has also created emergency loan programs and last month announced that it would intervene directly in the moribund mortgage market by acquiring up to $600-billion (U.S.) in direct debt and mortgage-backed securities from Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The mere announcement has already caused mortgage rates to fall sharply.

In yet another step, the central bank also intends to lend up to $200-billion to holders of securities backed by credit-card debt, car loans and small business loans.

The measures have more than doubled the size of the Fed's balance sheet to over $2-trillion. It might go much higher. “Could they go to $3-trillion or $4-trillion? If that's what they need to do to avert deflation, Bernanke said that's what they're going to do,” said U.S. market strategist Ed Yardeni of Yardeni Research.

But will it work? Japan pumped about ¥25-trillion of reserves into its financial system during its five-year experiment with quantitative easing, or about $340-billion (Canadian) at today's exchange rate.

During that period, Japan did rebound from its 1990s stagnation, enjoying its longest postwar expansion in the early part of this decade.

However, economists differ strongly about whether quantitative easing deserves the credit.

Bank of Japan governor Masaaki Shirakawa said earlier this year that the policy had “limited impact” because banks spooked by the long, hard decade before still refused to lend and companies to borrow.

Economist Richard Koo of Tokyo's Nomura Research Institute argues in his book The Holy Grail of Macroeconomics that turning to quantitative easing at a time of zero interest rates is like “a shopkeeper who, unable to sell more than 100 apples a day at 100 yen each, tries stocking his shelves with 1,000 apples.”

He argues that heavy government spending, not interest rate cuts or printed money from central banks, is the best way to get economies to bounce back from a severe crisis such as the current one.

Others argue that by pumping so much money into the economy so fast, the Fed could reignite inflation. That would force it to ratchet up interest rates again, choking off lending and growth in the midst of a recession.

“It's dangerous to have all this quantitative easing,” said Robert Brusca, chief economist with Fact and Opinion Economics in New York. “You wouldn't take your twins and send them to the backyard and say, ‘I'm going to give you a stick of dynamite and you matches. Whatever you do, don't strike the match.'”

But Mr. Bernanke has been suggesting for several years that central banks could try increasing the money supply through other means if cutting interest rates alone didn't work.

In a 2004 paper, he noted that “even if the price of reserves (the Federal funds rate) becomes pinned at zero, the central bank can still expand the quantity of reserves. … Some evidence exists that quantitative easing can stimulate the economy even when interest rates are near zero.”

That theory is about to be put to the test.

 

People paying the US Treasury to hold their money

The yield on US Treasuries is reported to be providing a negative return. That is investors are effectively paying to have their dollars protected from decreasing in value. Put in $1 and get back $0.99. Wow.

US Fed drops their rate to near zero

Fed drops from 1% to a target of 0 to 0.25%. Fortunately for the US Japan faced the same situation (at or near zero overnight rate) for almost 10 years so there is some global experience being drawn upon including increasing money supply to get people out spending more.

Banks don't follow BoC reduction - only drop .5%

In what appears to be a coordinated response this time, 4 of the 5 big banks have announced only reducing their prime rate by 0.5%. The ongoing reason is the cost of funds. While the first responders last time (TD & CIBC) had only moved 0.35% and the rest of the banks went the full 0.5% out of the gate (likely under pressure from the BoC), two of the lat responders last time (BMO & RBC) were first out this time.

While there is a reasonable chance the BoC will pressure the banks to lower their prime rates I think there is an increasing chance that they will resist making the move.

So far TD, RBC, CIBC and BMO have dropped their Prime rate by 0.5%. Still waiting to hear from Scoita.

Interestingly though, variable rate mortgage costs had reduced over the last week from Prime + 1% to prime +0.6% by most of the same lenders. The net effect for new variable rate mortgages is an even better rate than the 0.75% decrease. Existing clients won't see as much of an improvement but then again who can complain with a mortgage rate of between Prime - .90 to Prime - .5 giving a rate of between 2.6% and 3%. WOW

UPDATE: Scotia joins the crowd. Now we wait and see if the BoC and put enough pressure on one of them to take the lead in dropping another 0.25%.

Bank of Canada Drops Prime 0.75%

The Bank of Canada surprised most by lowering the overnight target rate by 0.75% to 1.5%.

There was talk of as much as 0.75% due to the dramatic moves by other central banks around the world last week but the expectation by most was 0.5%. The BoC says Canada is now entering a recession.

BoC Press Release....

OTTAWA

– The Bank of Canada today announced that it is lowering its target for the overnight rate by three-quarters of a percentage point to 1 1/2 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 1 3/4 per cent.

The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated. Global financial markets remain severely strained. Measures taken by major governments are beginning to encourage credit flows, although it will take some time before conditions in financial markets normalize. In addition, a series of recently announced monetary and fiscal policy actions will also support global economic growth.

While

Canada

's economy evolved largely as expected during the summer and early autumn, it is now entering a recession as a result of the weakness in global economic activity. The recent declines in terms of trade, real income growth, and confidence are prompting more cautious behaviour by households and businesses.

All of these factors imply a lower profile for core inflation than had been projected at the time of the last Monetary Policy Report in October.

Several factors are helping to counterbalance the negative drag from the global economic and financial developments. The depreciation of the Canadian dollar will continue to provide an important offset to the effects of weaker global demand and lower commodity prices. As well, money markets and overall credit conditions in

Canada

are responding to significant and ongoing efforts to provide liquidity to the Canadian financial system.

In light of the weakening outlook for growth and inflation, the Bank of Canada lowered its policy interest rate by a total of 75 basis points in October and by an additional 75 basis points today. These monetary policy actions provide timely and significant support to the Canadian economy.

The Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 per cent inflation target over the medium term.

TD Canada Trust lowers prime lending rate another 0.15%

 TORONTO, Oct. 10 /CNW/ - TD Canada Trust today announced that it has
lowered its prime lending rate by 15 basis points to 4.35 per cent, effective,
Tuesday, October 14, 2008.
    This morning the government announced that it will buy $25-billion in
insured mortgage pools to address Canadian banks' increased cost of borrowing.
    "We believe that this initiative will be put into effect in a way that
will reduce our overall cost of funds and, as a result we are dropping our
rate today. As we've been saying, a number of factors go into decisions about
rate changes. Financial markets are very turbulent, and funding costs are
still high. However, we anticipate that our cost of funds will decrease with
the implementation of this program, and therefore wanted to take action that
will benefit our customers directly," said Tim Hockey, President and CEO, TD
Canada Trust.

Loonie poised to post biggest weekly drop since 1971

http://www.financialpost.com/news/story.html?id=873580

TORONTO -- The Canadian dollar fell to its lowest point in 17 months against the U.S. dollar on Friday as fears of a global recession and weaker commodity prices outweighed some stronger than expected economic data.

Bond prices fell along with the larger U.S. market, on supply concerns due to massive new issues of government debt to pay for U.S. bailout measures.

At 9:48 a.m., the Canadian dollar was down 2.8% against the U.S. dollar at C$1.1788, or 84.83 cents. That compares to C$1.1458 to the U.S. dollar, or 87.28 cents, at Thursday's close.

"It looks like all the fundamentals have gone out the window," said Jacqui Douglas, currency strategist at TD Securities.

The currency has shed 8% this week, almost doubling its previous biggest weekly loss since at least 1970. That happened just last week when it took a 4.5% nosedive. Thomson Reuters data for weekly percentage changes in the Canadian currency go back as far as 1970.

Ms. Douglas said one of the main factors in the Canadian dollar's slide has been a sharp drop in commodity prices.

Canada is a major exporter of many natural resources, including oil, natural gas, and base metals.

Fears of a global recession and dropping demand have been hammering commodity prices. U.S. crude oil fell to under $80 a barrel after hitting over US$147 a barrel in July.

Another reason for weakness in the Canadian dollar has to do with where Canada sends exports, Douglas said.

"Canada is obviously one of the most vulnerable countries to a U.S. slowdown," she said.

More than three-quarters of Canadian exports are absorbed by the U.S. economy, which has been stunted by a recession in its housing sector and the credit crunch.

Canadian Finance Minister Jim Flaherty moved on Friday to shore up confidence in Canadian mortgages and banks. He announced the government will buy up to C$25 billion in insured mortgages in a bid to free up private sector lending.

On the economic data front, a report showed Canada had its largest monthly employment gain since Statistics Canada started collecting similar data in 1976. The country added 107,000 jobs in September, although most of the increase was in part-time employment.

Canada's trade surplus also defied expectations, jumping to $5.8 billion in August from $4.2 billion in July, but the increase was due to a fall in imports, not an increase in economic activity.

Canada's currency only registered a slight bump up on the data, before resuming its downward trend.

"The Canadian dollar has blown through all sorts of technical levels over the last couple of days and it's hard to say exactly when it's going to stop," Ms. Douglas said.

Bonds were lower along with the larger U.S. market due to the massive new U.S. debt supply to fund a bevy of U.S. programs intended to free up lending.

"It's more a U.S. story filtering into Canada," said Michael Gregory, senior economist at BMO Capital Markets.

"The (U.S.) Treasury has to issue a lot of bonds to help pay for all these programs that have come into place."

The Canadian overnight Libor rate was 3.725%, down from 3.733% on Thursday.

Thursday's CORRA rate was 2.5026%, up from 2.489% on Wednesday. The Bank of Canada publishes the previous day's rate at around 9 a.m. daily.

The two-year bond fell 12 cents to $101.20 to yield 2.170%. The 10-year bond slipped 75 cents to $104.30 to yield 3.714 %.

The yield spread between the two-year and the 10-year bond fell to 132 basis points from 137 basis points at the previous close.

The 30-year bond dropped $1.05 Canadian cents to $113.00 to yield 4.213%. In the United States, the 30-year treasury yielded 4.077%.

© Thomson Reuters 2008

Consumers shortchanged on rate cut

TD cites market turmoil for failing to fully follow BoC's lead

Actual article: http://www.financialpost.com/story.html?id=868590

Alia McMullen and Eoin Callan, Financial Post Published: Wednesday, October 08, 2008

Norm Betts/ Bloomberg News

The Toronto-Dominion Bank of Canada has become the first of Canada's banks to not pass on the full value of the Bank of Canada's emergency interest rate cut Wednesday.

TD Bank cut its prime lending rate by 25 basis points to 4.50%, even though the Bank of Canada slashed its benchmark rate by 50 basis points earlier Wednesday.

"Continuing market turmoil has steadily driven up the cost of borrowing for financial institutions," Tim Hockey, president and chief executive at TD Canada Trust said in a statement. "This makes it challenging to match the Bank of Canada rate cut at this time."

Canada's banks have been hard pressed to pass the full emergency rate cut on to consumers amid the worsening impact of the global credit crisis, economists say. But sources say even if banks are able to cut official prime lending rates, consumers will be unlikely to receive the full benefit as banks reduce loan discount rates to cover the difference.

Later Wednesday, Canadian Imperial Bank of Commerce said it, too, will only cut its prime lending rate by 25 basis points to 4.5% from 4.75%, effective Thursday.

The Bank of Canada cut the bank rate to 2.5% early Wednesday as part of an unprecedented globally co-ordinated emergency rate cut. The U.S. Federal Reserve, the European Central Bank, the Bank of England as well as the central banks of Switzerland and Sweden all slashed rates by half a percentage point.

Normally, the banks move in "lock step" with the Bank of Canada's interest rate cuts and reduce their prime lending rate by the same percentage, but "these are not normal economic times," Craig Alexander, an economist at TD Bank said.

The economist said Canada's big banks may opt to pass on only part of the emergency rate cut to consumers, with announcements expected within hours. This reflects the squeeze being put on Canadian banks by an unprecedented crisis in credit markets.

"Because the cost to financial institutions to raise financing has gone up, what this does is raise the possibility the lenders will not move in lock step," said Mr. Alexander.

Finance Minister Jim Flaherty Wednesday was unable to confirm if the banks would be in a position to pass the interest rate cut onto consumers.

"The banks will make their own decisions ... Let's see what they do," Mr. Flaherty said.

Canada's commercial banks are likely to have formalized their positions by early this afternoon, but economists said cutting the prime rate by an equivalent 50 basis points would be a tough decision for them to make. The prime rate fell to 4.75% following the Bank of Canadas 50 basis point cut to the bank rate on April 22.

The heightened expectations that the prime rate will remain elevated come after Australian commercial banks passed on only 80% of a 100 basis point interest rate cut on Monday. It was not the first time Australian banks had failed to pass on the entire reduction.

But bank sources said it would be possible for Canadian banks to pass the entire cut onto consumers via the prime rate, but banks would need to make up the difference elsewhere. For example, they might not offer the common discount to the rate when customers apply for the loan.

Major central banks slash rates in extraordinary move to ease crisis

HEATHER SCOFFIELD AND JOHN PARTRIDGE

Globe and Mail Update

October 8, 2008 at 9:20 AM EDT

OTTAWA — Major central banks took the extraordinary step of deeply cutting interest rates in an emergency co-ordinated move Wednesday, a development that serves to underline the deterioration of the world's banking system and threatened global recession.

Central banks in Canada, the United States, Britain, the European Union, Sweden and Switzerland cut key lending rates by half a percentage point. China's central bank joined others by cutting its key interest rates 27 basis points as of Thursday.

Only Japan, among the major central banks, opted out given that its rates are already at rock bottom.

A co-ordinated rate cut has been the subject of much market chatter over the past couple of weeks as stock markets and commodity prices have plunged, and credit has frozen.

The move came after a sharp overnight drop in Asian markets and U.S. stock futures that threatened to spark another North American selloff Wednesday. The Dow Jones industrial average lost 508 points Tuesday, bringing down markets globally. Britain also was rattled by a deepening banking crisis, forcing the government to announce a $80-billion bailout package.

“The pace of economic activity has slowed markedly in recent months,” the Federal Reserve said. “Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.”

The move gave some comfort to economists, but they warned the action is not enough to end the deepening financial crisis.

“Today's co-ordinated half-point cuts from all the major central banks ... will provide at least a temporary boost to confidence, but we fear there is still a lot more work to do,” said economists at London-based Capital Economics. “For a start, the fact that the central banks have had to take such extreme measures underlines how bad market conditions have become.”

The Bank of Canada lowered its key rate to 2.5 per cent, from 3 per cent, and tried to assure the public that Canada's banks were still solid.

“The intensification of the global financial crisis is having a marked impact on all countries. In recent weeks conditions in global financial markets have deteriorated sharply, the U.S. economy has weakened further, and commodity prices have fallen abruptly,” the central bank said in a statement it issued alongside a joint statement with other countries.

“As a result of these developments, credit conditions in Canada have tightened significantly, despite the relative health of our financial institutions.”

The central bank warned that the U.S. downturn and weakness among key trading partners is hurting Canada's exports. Plus, the domestic side of the economy is no longer on fire as commodity prices drop and the Canadian dollar slides, the bank noted.

Inflationary pressure is no longer an issue, the central bank said, since demand from Canadian consumers and businesses is no longer strong.

“This action will provide timely and significant support to the Canadian economy,” the bank said.

The joint action on Wednesday does not mean that the Bank of Canada won't consider more rate cuts at its next scheduled decision date on Oct. 21, central bank spokeswoman Jill Vardy said.

“It does not preclude more action on the 21st,” she said.

It's the first time since the terrorist attacks of September 2001 that the world's major central banks have taken a co-ordinated rate cut. The decision to move in concert was made Tuesday afternoon after policy makers agreed that working together would have far more impact on confidence and markets than taking individual measures.

“A co-ordinated reduction helps,” said Ms. Vardy. “It can prove more effective for central banks to act together.”

There may be more in store in Canada this week, aside from the central bank announcements and interventions in credit markets. Conservative Leader Stephen Harper said Tuesday the government has something else in store – although his spokesperson would not elaborate.

“The risk is that 50 basis points wasn't enough, and that none of that will pass through to consumers and businesses as interbank funding pressures continue to worsen even after the rate cut,” said Derek Holt, vice-president of economics at Scotia Capital Inc. “This is not the last of the cuts, and both the Fed and the Bank of Canada could easily cut another 100 basis points.”

Financial institutions in key countries around the world have essentially stopped lending money to each other for fear they won't be paid back. That, along with their need to deal with losses stemming from bad loans, has sparked a major hike in the cost of borrowing. It has also made the availability of money extremely scarce for consumers and businesses.

This credit crunch comes at the same time as the world economy is slowing, led by the United States, where the housing collapse has spread to the rest of the economy.

“I think the markets were assuming something along these lines would happen,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns in Toronto. “The scope of it is impressive, though. The fact that even China loosely joined in makes this, as far as I'm aware, unprecedented.”

It is a big but appropriate step, Mr. Porter added in an interview, and shows just how far the problem has spread and how serious it is.

However, while the rate cut “can't hurt,” he said, one concerted move by the central banks will not be enough to turn the tide.

“There need to be further moves down the road, and I don't necessarily mean just in rate cuts,” Mr. Porter said, citing the Fed's unprecedented offer Tuesday to step in and start buying commercial paper directly from companies and institutions that sell the short-term debt to finance day-to-day operations.

Still, the BMO economist also criticized central banks for not moving sooner after it became clear the $700-billion (U.S.) bailout package for Wall Street, passed by Congress Friday, was ineffective. “I thought they should have gone Monday, when it was obvious that the initial response to the bailout package wasn't that great,” he said.

The rate cut is just the latest in a long string of novel moves made by central banks in recent weeks. They have repeatedly flooded money markets with fresh cash in the form of short-term loans, and made such cash easier for financial institutions to borrow, by broadening what they will take as collateral.

In the United States, the government put together the rescue plan to sop up toxic assets undermining the stability of key banks. And in Europe, governments are bailing out banks, guaranteeing bank deposits, and talking about stimulus packages.

“Everybody's throwing everything in the tool box at this problem.” said Royal Bank of Canada chief economist Craig Wright. “I don't know that, given how negative sentiment is, any one event would turn it, but the hope is that the culmination of all these events starts at least to get recognized.”

The jury is still out on how much impact the co-ordinated rate cut by the central banks will have on sentiment, Mr. Wright added.

One key gauge, he said, is whether interest rate spreads shrink on interbank lending , particularly the so-called TED spread, the premium paid for three-month euro-dollar deposits over U.S. Treasury bill yields. These spreads have been at or near historic highs, demonstrating banks' extreme unwillingness to lend to each other as the global financial crisis continues.

Canadian Governments Urged to go with Economic Flow

Eric Beauchesne, Canwest News Service

The federal and provincial governments should do more to smooth the ups and down of their economies and those of local governments, a report by a western Canadian think-tank urges.

To do that, the Canada West Foundation report suggests they further free up the flow of workers, capital and goods across provincial borders, commit to stable funding of local governments, and adopt "cyclically-adjusted" balanced-budget targets that allow them to run deficits during economic downturns.

"Recessions and booms both impose costs on society," it notes in an analysis released Tuesday. "Recessions leave resources unemployed while booms spark periods of inflation . . . ."

"Recessions and booms also place strains on government finances," it added. "These stresses appear in the form of lost revenues and increased demands for income transfers during recessions, and increased demands for infrastructure spending during booms."

While the analysis focuses on the benefits to the western provinces of measures to stabilize their economies, the report - coming in the midst of a boom in the West and near recessions in the central provinces - makes it clear that its findings and recommendations apply to all regions of the country.

"All economies suffer the consequences of business cycles," it says, arguing that moderating those cycles will in turn reduce those costs.

And because the country can't have different interest-rate policies for different parts of the country, it falls to governments rather than the Bank of Canada to take the measures to moderate and reduce the costs of the ups and downs of the regional economies.

One of those measures would be for the further removal of interprovincial barriers to allow labour, goods and capital flow to where they're needed from where they're not.

"In a regionally diverse economy, the free movement of labour, capital and goods across regional boundaries acts in ways to dampen the amplitude of business cycles," it says, suggesting that the Trade, Investment and Labour Mobility Agreement between Alberta and British Columbia be adopted by "all provinces."

Another recommendation is that governments don't cut funding during economic downturns, which is when it is needed most. The report says that "provincial governments should consider imposing on their own budgets a long-term commitment to stable funding of local jurisdictions."

That, however, also demands that they abandon what in effect has become a prohibition on deficits and accept that, during an economic downturn, they may have to temporarily run deficits. The foundation recommends that balanced-budget targets be adjusted to take into account that revenues fall and expenditures rise during recessions, while the opposite occurs during booms.

"A cyclically adjusted budget balance is the difference between government revenues and expenditures after each has been adjusted to remove the influence of the business cycle," it explains.

Expect Smaller Raise Next Year, says Consulting Firm

With the economy slowing, Canadian employers on average plan to award smaller pay increases next year than this year, though with labour markets in some regions and industries still tight, not much smaller, survey results released Wednesday suggest.

And the planned pay hikes on average are still higher than inflation, according to the survey by consulting firm Mercer Canada.

"Due to a tightening economy and labour market, employers plan to award average base pay increases of 3.8 per cent in 2009, slightly less than the four per cent increase granted in 2008," Mercer said in releasing the results from its annual survey.

However, the planned pay hikes vary widely by region and industry, ranging from 5.4 per cent in the oil-and-gas sector to 3.4 per cent in the struggling durable manufacturing and transportation sectors.

"Clearly the uneven economy is having an impact on human capital and compensation strategies," said Iain Morris, principal at Mercer.

"Alberta's economy, led primarily by the energy and natural resources sectors, continues to boom and employers are granting higher pay increases to reflect this growth," he said. "Organizations in other areas, such as Ontario where the manufacturing sector is struggling, are facing the challenges of a tightening economy."

The latest annual survey conducted in late spring includes responses from more than 485 employers in Canada covering almost 1.7 million workers. About one-third were planning higher pay hikes than this year, one-third lower pay increases and one-third no change.

However, a Statistics Canada report also released Wednesday shows employee earnings this year have started to slip behind what has been rising inflation in recent months.

Average weekly earnings in June were up just 2.5 per cent from a year earlier, less than the 3.1 per cent increase in the cost of living over that time, and what has since been an even steeper rise in the inflation rate to 3.4 per cent last month.

But as with the results of the Mercer survey of planned pay hikes, the actual increases in earnings varied widely by industry and region.

The strongest year-over-year earnings growth was in Alberta, at 4.6 per cent, followed by Saskatchewan at 3.7 per cent, Newfoundland and Labrador at 3.1 per cent, and Manitoba at three per cent, the Statistics Canada report shows. The smallest gains were 0.9 per cent in British Columbia, and less than two per cent in Prince Edward Island and Nova Scotia, with the increases in the other provinces being between two and three per cent.

"Over the past year, earnings among Canada's largest industrial sectors increased by 3.6 per cent in educational services, 2.6 per cent in manufacturing, 2.5 per cent in health and social assistance, 2.1 per cent in accommodation and food services, and 1.6 per cent in retail trade," Statistics Canada said.

Meanwhile, the report on the Mercer survey noted that employers are also using cash-based approaches, such as signing bonuses, spot cash awards and retention bonuses to hire and retain key talent, Mercer noted.

"Although these cash-based strategies are quite effective in solving immediate needs, a more holistic approach to total rewards - one that considers base pay, variable pay, benefits and career development - is critical for maintaining a competitive advantage in the marketplace," Morris said.

The Mercer survey did not provide a comparison of planned wage increases for unionized and non-unionized workers.

However, Statistics Canada in another report on unionization, noted that wage gains for unionized workers averaged 3.4 per cent over the first four months of this year, which surpassed what up to then was a more modest 1.9 per cent increase in the cost of living, and was up from an average wage gain of 3.3 per cent in 2007.

Wages gains for unionized workers have surpassed inflation in each of the past three years, it said, noting that in 2007 they "significantly surpassed" the 1.9 per cent inflation rate.

It noted that, generally, unionized workers enjoy higher wages than non-unionized workers, with the union wage premium estimated at 7.7 per cent.

Last year, full-time union workers earned an average of $24.15 an hour compared with $20.55 an hour for non-unionized workers.

Weak Economic growth, Lower Bank Earnings Expected

Eric Beauchesne, Canwest News Service
Published: Monday, August 25, 2008

Article in Full

Canada has avoided a recession so for, but just barely, figures being released this coming week are expected to show.

But we're not out the woods, analysts warn, including one financial institution that says Ontario will go into recession while Quebec will just skirts one.

"The Canadian economy likely managed to eke out a trace of growth in the second quarter, just avoiding a second consecutive quarter of declining GDP and averting a technical recession -- for now," says BMO Capital Markets economist Douglas Porter, projecting that Friday's report will show growth was at an anemic annual pace of just 0.6 per cent.

And another financial institution, Desjardins Group, warned that the country's largest province will fall into recession.

"It now looks fairly clear that, unlike Quebec, Ontario will not be able to sidestep a recession," it said.

The weakness in the Canadian economy, and the impact of the financial crisis that erupted last year, will also continue to be reflected in the coming week's quarterly bank earnings reports, analysts warned.

"Canada's six big banks report third-quarter earnings ... and they are not expected to be pretty," CIBC World Markets warned. "To date, Canadian banks have announced approximately $10 billion in writedowns since last summer's financial crisis began, and while a third consecutive quarter of lower aggregate earnings appears to be a given, it will be the magnitude of further writedowns that will be closely watched.

Bank of Canada deputy governor David Longworth will outline what the central bank has done to deal with that crisis in a speech Tuesday that will likely include an update of its assessment of the current financial situation and outlook

Meanwhile, it won't be all bad news this coming week.

A Statistics Canada report on Thursday on how Canada fared in its dealings with the rest of the world during that quarter should show a fat $8.2 billion surplus, which works out to an annualize $33 billion and which "would mark one of the largest nominal surpluses on record," BMO's Porter said.

The recovery from a near deficit last year is thanks to soaring world prices for commodities that Canada exports, and in part to the stabilization in the value of the Canadian dollar, Porter said.

The Canadian economic reports will likely look a lot better than what's expected out of the United States this coming week. That, of course, is small consolation to Canadians, considering America is the market for more than three quarters of Canadian exports.

"While we may see a small gain in existing home sales in July as more foreclosed houses are put on the market at bargain prices, new home sales are expected to fall in July," Scotiabank said in an analysis, in which it warned that it will likely be the middle of next year before the bottom of the deeply depressed U.S. housing market is reached.

While a measure of U.S. consumer confidence this month, being released Tuesday, is expected to show some modest improvement from the 16-year low in July, it will be temporary, Scotiabank also warned.

Without the spring fiscal stimulus package now spent or saved, and without a second package coming down the pike, it warned that consumer confidence will likely resume its slide over the next few months.

And with the U.S. job market having weakened and real wages moderating, a report Friday on U.S. incomes in July is expected to show a decline in incomes, it said.

Early Monday Canadian Markets: Toronto stocks down on energy, Maple Leaf

The Toronto Stock Exchange's main index fell more than 100 points on Monday morning, dragged down by the heavyweight energy and financial sectors, while Maple Leaf Foods tumbled amid a recall of meat products linked to a food-poisoning outbreak.

Activity in the energy sector was choppy, but by midmorning the group was down 1.4 per cent as the price of oil remained below $115 a barrel in choppy trade Canadian Natural Resources fell 1.3 per cent to $85.45.

Financials also weighed, slipping one per cent, on nagging concerns over the health of the U.S. financial sector as Lehman Brothers remained under the spotlight as a possible acquisition target.

Adding to fears, bank U.S. regulators closed Columbian Bank and Trust Company late on Friday. It is the ninth U.S. bank to fail this year, hit by the weakening economy and falling home prices.

"Market sentiment right now is banks are not making as much money as they used to," said Francis Campeau, broker at MF Global Canada, in Montreal. "All Canadian banks are releasing earnings this week, so you will see very choppy trading today."

By midmorning, the S&P/TSX composite index was down 116.51 points, or 0.9 per cent, at 13,330.78, with eight of its 10 main groups lower.

The consumer staples sector was down 0.7 per cent, with Maple Leaf down 7.5 per cent at $9.06 after it said it expects direct cost of about $20 million from a nationwide meat recall linked to an outbreak of listeriosis. So far, the food poisoning has killed at least four people and sickened 21 others.

On the merger front, Precision Drilling announced its takeover of Grey Wolf in a cash and stock deal worth about $2 billion, creating one of the largest North American oil and gas rig operators.

Precision Drilling slipped 6.8 per cent to $20.71.

As well, Q9 Networks Inc., a provider of outsourced data infrastructure, soared 28.3 per cent to $16.70 after it said it has agreed to be bought by private equity firm Abry Partners in a cash transaction worth about $361 million.

The materials sector fell 0.4 per cent, amid weakness in gold and some base metal prices. Goldcorp was down 0.3 per cent at $34.98, while Barrick Gold fell 0.6 per cent to $36.10.

Full article can be found: The Vancouver Sun

Gas Prices Drive Canadian Inflation Spike

Higher gasoline prices pushed Canada's annual inflation rate to a five-year high of 3.4 per cent in July from 3.1 per cent the previous month, Statistics Canada said Thursday.

The increase in last month's consumer price index was in line with most economists' expectations.

"July saw the highest 12-month increase since March 2003. A climb in gasoline prices was the primary source of higher consumer prices in July," the federal agency said.

Prices at the pump were up 28.6 per cent last month from a year early, it said.

"Besides higher prices for gasoline, price increases for other energy components, such as fuel oil and other fuels and electricity, rose sharply in Newfoundland and Labrador, Prince Edward Island and Nova Scotia in the 12 months to July," the agency said.

"The rise in these energy components largely accounted for the growth in consumer prices posted in these province."

On a monthly basis, prices rose 0.3 per cent in July from June, down from a 0.8 per cent increase from May to June.

Mortgage costs were up 8.5 per cent in July from a year earlier, down from a nine per cent annual pace in June. "The slowdown in the rise in mortgage interest cost was due more to a softening of new housing prices rather than to lower mortgage interest rates," the agency said.

Prices for food purchased from stores rose 4.3 per cent from July 2007, led by a 13.2 per cent jump in the cost of bakery products.

Overall, consumers were hardest hit in Prince Edward Island, where year-on-year inflation rose 5.3 per cent, Newfoundland and Labrador, up 4.2 per cent, and Nova Scotia, up 4.2 per cent.

"While consumers across the country faced higher prices for gasoline and mortgage interest costs, lower prices to purchase and lease passenger vehicles helped to offset these price increases," Statistics Canada said. "Changes in prices to purchase and lease passenger vehicles ranged from a 7.6 per cent decrease in Quebec to an 11.4 per cent decline in New Brunswick."

The core price index - which strips out volatile items such as energy and certain foods, and is used by the Bank of Canada to monitor the impact of inflation - remained at 1.5 per cent, on a year-on-year basis, for a fourth consecutive month. From June to July, core prices edged up 0.1 per cent, after a gain of 0.3 per cent from May to June.

The Bank of Canada has forecast that inflation will peak at 4.3 per cent in the first quarter of 2009 as energy prices continue to fuel consumer costs. However, the central bank is expected to keep its trend-setting interest rate at three per cent as it focuses on spurring economic growth, with inflation pressures expected to ease.   

"This report offers no big surprises, which is a good thing in light of the high-side shocks seen in many other CPI releases around the world in recent months," said Douglas Porter, deputy chief economist at BMO Capital Markets.

"And while headline inflation is now running at its fastest pace in more than five years, it is still near the bottom of the pack globally - and more than two points below the current U.S. pace," he said.

"Lower gasoline prices suggest that headline inflation will pull up short of the Bank of Canada's earlier projection of four-per-cent-plus inflation, but tough year-ago comparisons in the next few months also suggest that a fast retreat in inflation is unlikely."

Charmaine Buskas, economics strategist at TD Securities, said the July report "is probably the last opportunity for energy prices to make a significant contribution to inflation as commodity prices have fallen quite dramatically over the past month and are likely to exert a moderating influence on CPI going forward."

This article can be found on the Vancouver Sun website

As inflation hits new highs, bankers shift worries to growth

Inflation in the world's richest countries appears to be peaking, allowing central banks to focus squarely on their sputtering economies.

U.S. consumer prices climbed 5.6 per in July, the fastest rate of inflation in 17 years. But that was the month oil prices peaked and as they have retreated the cost of living has been coming down. In Europe,government figures showed inflation leveled off at 4 per cent in July.

Those figures were among a raft of data released yesterday in Europe and North America that suggest the balance of risk in the global economy - at least in developed countries - is tilting to growth rather than inflation.

The most troubling news was a government report released in Brussels that said Europe's gross domestic product shrank 0.2 per cent in the second quarter, the first contraction since the adoption of the euro almost a decade ago.....

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Report on Business

 

New Home Prices Soften, Construction Plummets

Gary Marr, Financial Post

New home construction, fuelled by a major drop in Ontario, continued to decline last month confounding economists who now say the housing market is falling faster than expected.

Canada Mortgage and Housing Corp. said they were 186,500 new homes constructed last month on a seasonally adjusted annualized basis, a 13.6% drop from a month earlier. The pain was felt hardest in Ontario's condominium market where the construction of multiple apartment units was down 57.9% in July from a month earlier.

Paul Ferley, assistant chief economist with RBC Economics, noted the slide in housing starts was worse than many economists had estimated. The consensus was for 210,000 starts in July which would have been only a 3.6% decline from June.

"The weakness is occurring much sooner than we expected," said Mr. Ferley, adding no one is expecting the Canadian housing market to get as ugly as its United States counterpart.

"The drop in starts in July was likely slightly overstated with the weakness largely concentrated in Ontario. However, housing activity is definitely on a downward trend consistent with indications of deteriorating affordability through last year," said the economist.

Most of the country was hit by the sudden dip with Alberta and British Columbia the only exceptions. Starts rose 23% in Alberta from a month earlier and 5% in B.C. from June to July.

While much is being made of the fact that the condominium sector skewed the July numbers, construction of single family homes is also waning. CMHC said urban single starts dropped 6.6% in July from a month earlier.

Brian Johnston, president of Monarch Corp. a major developer in the Toronto region, said the problem is the housing sector just cannot compete with its own past record. Starts hit a 19-year in 2006 and dropped only marginally last year.

"I would suggest there is a worrying trend that we are seeing such significant drop offs," said Mr. Johnston. "Starts always follow sales and I can tell you sales are definitely trending down in 2008."

Mr. Monarch said the market is cooling and builders are feeling it because they are unable to raise prices at a time when some of their costs are going up. Market conditions for existing homes are the same, with sales dropping and prices flat or falling across the country.

"It's a tougher market out there. I don't think we are in panic mode, there isn't a huge concern but we are definitely slowing down to some extent," said Mr. Johnston.

CMHC said it still expects for the seventh straight year that starts will top 200,000, the strongest housing run in Canadian history.

"It's not that bad," said Bertrand Recher, senior economist with CMHC. "What you saw was a one-month blip due to the multiple starts in Ontario and that's mainly Ontario."

In the first six months of the year, condo construction soared in Ontario and now it appears that run is over. "This is a readjusting because of those strong months," said Mr. Recher.

Pascal Gauthier, an economist with TD Bank Financial Group, echoed those comments. "There will be a natural tendency to read too much into this monthly decline," he said. "We think it's important to caution observers against such knee-jerk reaction to this month's CMHC report. Residential construction is easing and should continue to do so."

Financial Post

Canada's Economy Declines Unexpectedly by 0.1 per cent in May

Canada's economy took an unexpected dip in May, after edging higher in the previous month, as activity in major sectors like energy, forestry and construction declined, Statistics Canada said Thursday.

Gross domestic product edged down 0.1 per cent in May - the fourth decline in six months - compared to a rise of 0.4 per cent in April, the federal agency said.

Most economists had expected the economy to expand by 0.2 per cent in May."There was a significant decrease in the energy sector in May. Declines were also recorded in finance, forestry, construction and wholesale trade," the agency said. "Conversely, manufacturing, retail trade and the public sector advanced."

The economy shrank in the first quarter of 2008, prompting concerns that Canada could be heading into a recession - traditionally measured as two consecutive quarterly declines.

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The Vancouver Sun

Plunge in commodities values may be beginning of the end, Economist warns

John Morrissy, Canwest News Service

Investors eager to pounce on the recent dip in commodities may be buying into a bursting bubble rather than an overdue correction, says National Bank Financial chief economist and strategist Clement Gignac.

With everything from oil to gold to corn plunging in value in recent weeks, many analysts are advising that these declines may be the beginning of the end for the world's multi-year commodity boom.

Gignac traces the market's moves in recent years from one bubble, the dot-com era, to the next, housing, and asks: "Will the commodities theme perceived as the ultimate safe haven asset class since last fall also prove to be a bubble?"

Bullish camp observers continue to push the argument that supplies will remain strained, driven by demand from emerging nations, Gignac said. But recent price declines in the face of record-high values tell a different story, one of demand destruction.

Evidence of that is cropping up across North American energy markets, as consumers cut back on driving in the face of record-high gasoline prices.

To read more on this article please visit The Vancouver Sun.

Oil, dollar poised for fall

Oil prices will sink well below $100 US and the Canadian dollar will retreat to the mid-90 cents US level, the federal export promotion agency said in its latest forecast Thursday.

Exports will rise by 4.2 per cent this year, Export Development Canada predicted, but added that all of the increase will come from higher energy prices as the volume of trade is projected to fall by four per cent.

And the outlook for exports next year is no brighter despite the more competitive currency as the retreat in prices for oil and other commodities pulls exports earnings down by one per cent, it said.

To read the rest of the article please visit The Vancouver Sun.

Bank of Canada keeps overnight rate target at 3 per cent

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 3 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 3 1/4 per cent.

Three major developments are affecting the Canadian economy: the protracted weakness in the U.S. economy; ongoing turbulence in global financial markets; and sharp increases in many commodity prices. The first two developments are evolving roughly in line with expectations in the April Monetary Policy Report. However, commodity prices are continuing to outstrip earlier expectations. This has led to further increases in Canada's terms of trade and real national income, and has altered the outlook for global and domestic inflation.

Although Canadian economic growth in the first quarter was weaker than expected, final domestic demand continues to expand at a solid pace. The economy is judged to have moved into slight excess supply in the second quarter of this year; excess supply is expected to increase over the balance of the year. High terms of trade, accommodative monetary policy, and a gradual recovery in the U.S. economy are expected to generate above-potential growth starting early next year, bringing the economy back to full capacity around mid-2010. Canadian GDP is projected to grow by 1.0 per cent in 2008, 2.3 per cent in 2009, and 3.3 per cent in 2010.

Total CPI inflation over the next year is expected to be much higher than projected at the time of the April Report. Assuming energy prices follow current futures prices over the projection period, total CPI inflation is projected to rise temporarily above 4 per cent, peaking in the first quarter of 2009. As energy prices stabilize and with medium-term inflation expectations remaining well anchored, total inflation is then projected to converge to the core rate of inflation at the 2 per cent target in the second half of 2009. Core inflation is projected to remain well contained and broadly in line with earlier expectations, averaging close to 1.5 per cent through the third quarter of this year and then rising to 2 per cent in the second half of 2009.

The three major developments affecting the Canadian economy pose significant upside and downside risks to the Bank's base-case projection. Weighing the implications of these, the Bank views the risks to its base-case projection for inflation as balanced.

Against this backdrop, the Bank judges that the current level of the target for the overnight rate remains appropriate. The Bank will continue to monitor carefully the evolution of risks, together with economic and financial developments in the Canadian and global economies, and set monetary policy consistent with achieving the inflation target over the medium term.

The Bank's detailed projection for the economy and inflation, and its assessment of risks to the projection, will be published in the Monetary Policy Report Update on 17 July 2008.

Information note:
The Bank of Canada's next scheduled date for announcing the overnight rate target is 3 September 2008.

B.C.'s Leaky Condo Crisis Far from Over

Coastal British Columbia's leaky condo crisis is far from over, a recent report prepared for the provincial government shows.

The report acknowledges for the first time that thousands more strata-owned apartment units suffered water damage than the government has been estimating.

By 2012, when the leaky condo era enters its fourth decade, as many as one-third of the defective units will remain unrepaired, said the report, prepared for the province's Homeowner Protection Office (HPO) by private consultants.

At least 45 per cent and possibly as many as 68 per cent of leaky buildings have not been repaired yet, according to various scenarios explored by the consultants.

They also revealed that of the nearly 160,000 strata-owned apartment units built during the leaky condo period -- considered to date from 1982 to 1999 -- 45 to 55 per cent have suffered "premature building envelope failure."

James Balderson, spokesman for the Coalition of Leaky Condo Owners, said the report helps to reveal the magnitude of the leaky condo problem, which he always thought was being underestimated.

However, Balderson says the HPO report, written by the consulting firm McClanaghan and Associates, still underestimates the number of condominium units that are likely to suffer problems with leaks.

"I've been saying that for years," Balderson said in an interview. "The Homeowner Protection Office has underestimated [and] under-reported the number of leaky, rotten condos."

He said the number of affected units will continue to be underreported because the cut-off points for drops in value and the time frame of construction the HPO uses to determine which buildings qualify for assistance mean it excludes many leaky homes.

HPO chief executive Ken Cameron and Housing Minister Rich Coleman could not be reached for comment Tuesday.

The new report said at least 72,000 strata units leaked and suffered water damage, and possibly as many as 87,500.

The HPO and the provincial government insisted for many years that no more than 65,000 strata apartments were damaged, including all the ones that had not been discovered yet.

The report said officials now realize they still don't know "the full extent of building envelope failure."

The consultants made no attempt to estimate the total cost of the damage, but concluded that early estimates of the repair cost per unit -- $10,000 to $15,000 -- were far too low.

"Based on the HPO experience, it would appear that the actual average repair costs are approximately five times or six times higher," they said.

By last September, repair loans the HPO makes to leaky condo owners had grown to an average of $62,000 for wood-frame apartments, and $72,000 for those in concrete buildings.

The repair costs continue to escalate because of construction cost inflation, 10 per cent last year and expected to be eight per cent this year, the consultants added.

The report's findings were based in part on the HPO's repair loan statistics -- it has been making repair loans since 1999 -- and in part on B.C. Assessment Authority records of units that suffered a sudden drop in assessed value of 15 per cent or more, a likely sign of building envelope failure.

William Boei, with files from Derrick Penner, Vancouver Sun
Published: Wednesday, July 09, 2008

When the Party's Over

OHN HEINZL ,Globe and Mail Update, June 24, 2008

While the rest of the world is looking ahead to the Beijing Olympics this summer, Robbert van Batenburg is already contemplating what will happen after the athletes have taken their medals home.

If you own resource stocks whose fortunes are tethered to China's booming economy, you may not like what he has to say.

“I'm not a bear on commodities, but I do know that sometimes people look at things through rose-coloured glasses,” says the head of global research at Louis Capital Markets in New York. “I want to make something very clear. I don't think a lot of people are understanding what is going on in China right now.”

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ECB hikes rates to 4.25%

MARC JONES
Article Link

July 3, 2008 at 10:28 AM EDT

FRANKFURT — European Central Bank President Jean-Claude Trichet said the ECB has no bias on future policy moves after it raised interest rates for the first time in over a year on Thursday, taking them to 4.25 per cent from 4.0 per cent.

“The monetary policy after today's decision will contribute to achieving our objective of price stability,” he told a news conference. “Starting from here I have no bias. You know of course our constant position which is part of our monetary policy handling – we have no pre-commitment on the medium term.”