|
Call Now! 1-866-932-8412 or
Email: info@mortgagegirl.ca |
by Mark Jasayko and Neil McIver
The Vancouver Sun
Interest rate policy is often divisive, pitting borrowers against savers and investors against speculators.
On Tuesday, the Bank of Canada raised its key lending rate from 0.50 per cent to 0.75 per cent. On balance, this rate increase will be good for Canada, whose economy has reached a level that is the envy of others, judging by the accolades received in the international press.
However, using low rates to stimulate our economy towards an even higher trajectory could create imbalances that will eventually risk our new global economic standing.
To some, such as politicians, speculators and profligate consumers, a juiced-up economy sounds like a fantastic proposition. Unfortunately, most Canadians don’t fall into any of these categories. If interest rates are kept too low for too long, economic resources begin to flow rapidly to relatively unproductive uses. In the end, disasters such as real estate bubbles pose the greatest risk.
We only have to look south to see what an era of “easy money” interest rate policies have achieved: a real estate meltdown and an economy that has remained flat for a decade when the effects of financial engineering and over-borrowing are netted out. Apart from some lucky real estate speculators who timed things perfectly, is the U.S. better off?
Higher rates would have played an important role in bringing balance to the U.S. economy. Instead, there were some stunning side effects of low rates that included the statistic that 40 per cent of all job creation was related in some way to real estate (agents, bankers, mortgage brokers, construction firms, etc.) before the bubble burst.
Higher rates would have helped other service and manufacturing industries to compete for the labour that was otherwise attracted to real estate with its fevered speculation and promises of unending growth.
In a concerning development, real estate prices in Canada are back at record levels and in many cities prices exceed afford-ability indices. If the bank rate is kept too low for much longer, Canada risks the potential of becoming an economy that is too dependent on maintaining real estate price trends, inhibiting our ability to grow beyond the currently hot economic industries of construction and resources. The future of our economy will be on more solid ground with more diversification and job growth in other areas, and interest rate policy will have an effect on this.
Another benefit of higher rates is to provide savers with a yield. Recently, savings rates in Canada have plummeted as Canadians are being induced to borrow and spend while employment remains strong and rates remain low. In addition, there is reduced incentive to save and invest when yields are so low.
Even worse, for those who are saving or who depend on current investment income, there is the temptation to invest in lower quality investments in order to pick up a little more yield.
The asset-backed commercial paper catastrophe illustrated the hazards of this strategy for income-seeking investors who did not have the resources to assess the true underlying quality.
Finally, being able to cut rates in a time of crisis is crucial. However, this tool is drastically compromised when rates are already severely low, tantamount to “pushing on a string.” If the anemic global economy begins to impact Canada through trade flows, we are going to need all the policy ammunition we can muster.
Increased rates now will ensure that we are able to fight that battle if it arrives, thereby protecting our newly acquired, and envied, economic advantages.
Mark Jasayko and Neil McIver are portfolios managers with McIver Wealth Management Consulting Group at Richardson GMP Ltd.
Bank of Canada raises benchmark interest rate
The Bank of Canada has raised again its benchmark interest rate by 0.25% to 0.75% on Tuesday, the second consecutive hike after more than a year of record low rates.
The bank had previously raised its benchmark rate to 0.5 per cent in June after having kept rates at emergency lows since April 2009.
In the accompanying statement, Mark Carney and his team said:
The Bank expects the economic recovery in Canada to be more gradual than it had projected in its April MPR, with growth of 3.5 per cent in 2010, 2.9 per cent in 2011, and 2.2 per cent in 2012. This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada. The Bank anticipates that business investment and net exports will make a relatively larger contribution to growth.
The bank also made it clear that future rate hikes are not guaranteed.
“Any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments,” the bank added in its statement.
In raising the rate, the bank is effectively slowing down Canada’s economy, which had shown signs of significant strength in recent months, by boosting the country’s dollar and curbing exports. In terms of borrowing costs, strong demand for Canadian debt from foreigners should work to keep longer term yields down, so the effect of the bank’s hikes will be felt more on the short term end of the yield curve.
Economists predict Carney will raise rates again in September before pausing at one of two meetings in the fourth quarter, when economic growth may slow to a 3.1 percent pace instead of the 3.5 percent the bank predicted in April.
Gross Domestic Product stalled on April
Gross Domestic Product stalled unexpectedly in April after seven consecutive monthly increases as retail and manufacturing dropped, Statistics Canada reported this week.*
At the same time, retail trade fell 1.7% during the same month, following a 1.9% gain in March. Together with smaller declines in manufacturing and utilities were offset by increases in mining, wholesale trade and, to a lesser extent, the public sector and construction.
Nonetheless, it is widely believed that the Bank of Canada will probably raise rates for a second straight time at its July 20 meeting.
Mark Carney had already warned in April that the economy’s rebound from the crisis would slow significantly starting in the second quarter as the housing market was beginning to cool, the dollar was trading near parity with its U.S. counterpart and the impact of government spending was fading.
Those factors, and the arguably more dominant headwinds from Europe and the United States as the these fragile advanced economies walk the tightrope from stimulus spending to deficit-cutting, have kept the central bank insisting that nothing about its path to a more normal monetary policy is “pre-ordained from here forward.”
“The Bank of Canada will take all of this into consideration, including what’s happening in global financial markets, before making its decision,” Krishen Rangasamy, an economist with CIBC World Markets in Toronto, said in an interview. “If you see the stock market plunge 500 points the day before the decision, that may change things. But if we don’t see something like that, if financial markets stabilize, then there’s no reason for the bank to pause in its tightening.”
* The monthly gross domestic product (GDP) by industry data at basic prices are chained volume estimates with 2002 as their reference year. This means that the data for each industry and aggregate are obtained from a chained volume index multiplied by the industry’s value added in 2002. For the 1997 to 2006 period, the monthly data are benchmarked to annually chained Fisher volume indexes of GDP obtained from the constant-price input-output tables.
For the period starting with January 2007, the data are derived by chaining a fixed-weight Laspeyres volume index to the prior period. The fixed weights are the industry output and input prices of 2006. This makes the monthly GDP by industry data more comparable with the expenditure-based GDP data, chained quarterly.
CIBC follows suit and cuts mortgage rates
The Canadian Imperial Bank of Commerce (CIBC) has trimmed 0.1 percentage points off a number of its residential mortgages, following similar moves on Thursday by several of the major banks, dropping the bank’s benchmark posted five-year fixed rate to 5.89 per cent.
CIBC is the latest Canadian bank to announce lower residential mortgage rates. RBC Royal Bank (TSX:RY), TD Canada Trust (TSX:TD) and Bank of Montreal (TSX:BMO) all lowered most their posted fixed-term mortgages by one-tenth of a point.
Canadian banks typically raise or lower their rates for fixed-term mortgages depending on bond markets, whereas variable-rate mortgages reflect adjustments on the banks’ prime rates.
Current CIBC Prime Rate as of June 25, 2010
Closed Mortgages |
Term | |||||||
| 6 mos | 1 yr | 2 yr | 3 yr | 4 yr | 5 yr | 7 yr | 10 yr | |
| CIBC Convertible Mortgage | 4.95 | |||||||
| CIBC Fixed Rate Closed Mortgage | 3.70 | 4.05 | 4.70 | 5.64 | 5.99 | 7.05 | 7.10 | |
| CIBC Better Than Posted Mortgage®** | 3.83 | 4.82 | 4.92 | 5.72 | 5.75 | |||
| CIBC Variable Flex Mortgage™ | 2.35 | |||||||
Open Mortgages |
Term | |||||||
| 6 mos | 1 yr | 2 yr | 3 yr | 4 yr | 5 yr | 7 yr | 10 yr | |
| CIBC Fixed Rate Open Mortgage | 6.70 | 6.45 | ||||||
| CIBC Variable Rate Open Mortgage | 3.30 | |||||||
- Six-month convertible 4.85 per cent, down 0.10 per cent
- Six-month open 6.70 per cent, no change
- One-year open 6.45 per cent, no change
- One-year closed 3.60 per cent, down 0.10 per cent
- Two-year closed 3.95 per cent, down 0.10 per cent
- Three-year closed 4.60 per cent, down 0.10 per cent
- Four-year closed 5.54 per cent, down 0.10 per cent
- Five-year closed 5.89 per cent, down 0.10 per cent
- Seven-year closed 6.95 per cent, down 0.10 per cent
- 10-year closed 7.00 per cent, down 0.10 per cent
These rates are effective Saturday, June 26, 2010.
About CIBC
CIBC (TSX, NYSE: CM) is a leading Canadian-based global financial institution. Through two major operating groups, CIBC Retail Markets and Wholesale Banking, CIBC provides a full range of financial service products and services to almost 11 million individual, small business and commercial, corporate and institutional clients in Canada and around the world.
The Canadian Bank of Commerce (The Commerce) opened for business on May 15, 1867 in Toronto. The head office and main branch were located on the corner of Yonge and Colborne in what would become Toronto’s financial district. The Honourable William McMaster, a prominent Toronto businessman and philanthropist, was the principal founder of the bank and its first president. Concerned about Montreal’s influence over the economy of Upper Canada, McMaster founded the bank mainly as competition for the Bank of Montreal. An aggressive businessman, he rapidly expanded the bank and its network of branches; by 1874 it had 24 branches, making it the largest bank headquartered in Ontario.
The Imperial Bank of Canada (The Imperial) opened in Toronto on March 18, 1875. Its original premises were located at 18 Toronto Street, not far from The Canadian Bank of Commerce. Henry Stark Howland, previously vice-president of The Commerce, was the principal founder and first president of the new bank.
Competition was fierce as banks raced to be the first in towns that were sprouting up in western Canada. The staff of the Vegreville, Alberta branch opened for business in an abandoned log and mud hut in September 1905. Not only did the hut act as a branch for the first two months, it was where the branch’s employees slept as well, and employees shared their sleeping bags with the garter snakes that moved in as the nights got colder. The branch soon moved from the mud hut to a homesteader cabin, and then to a pre-fabricated building in 1906.