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A softer Canadian housing market, the end of federal stimulus packages and guarded spending by U.S. consumers will be a drag on Canada’s economy, according to a report by Avery Shenfeld, Managing Director and Chief Economist with the wholesale banking arm of CIBC.
The CIBC projects the real Canadian gross domestic product, an inflation-adjusted measure of the economy, will grow by 1.9 per cent in 2011, compared with the 3.2 per cent pace assumed in the 2010 federal budget last March.
Ontario will take the brunt of the expected blow — falling an estimated 1.6 per cent below the forecast for next year — because about 80 per cent of its exports are shipped to the United States.
Meanwhile, other provinces heavily weighted in export industries will suffer notable declines. Quebec is expected to see provincial GDP fall 1.1 per cent, while Manitoba is projected to fall one per cent short of forecasts, CIBC said.
Resource-heavy provinces like B.C., Alberta, Saskatchewan and Newfoundland and Labrador will lead growth but are expected to also face challenges meeting their budget forecasts.
Western Canada could face a tougher challenge in its housing market, where prices have overshot fair market value by the largest margin. That’s expected to have a slowdown effect on residential construction, the report said.
Shenfeld said the federal government shouldn’t allow a softening economy to derail plans to return to a balanced budget, and instead the Bank of Canada could back off from plans for higher interest rates, to adjust for a more challenging economic environment.
“We have started the process of raising interest rates, presumably to prevent growth from being so brisk that inflation breaks out. If policy needs to adjust to a more challenging climate abroad, it should be done by backing away from plans for tightening through even higher interest rates,” elaborated Shenfeld.
“Only if the Bank of Canada were forced to take rates back to zero would it be appropriate to postpone a much-needed, if gradual, path back to fiscal rectitude.”
Interest Rates Forecasts from Canada’s Big 5 banks
Canadian Mortgage Trends has put together a summary of the latest year-end interest rate projections from each of Canada’s Big 5 banks.
These forecasts come from each of the banks’ economic teams, that obviously have access to every data source, academic study, historical back-test, and analysis tool imaginable. Having said that, Canadian Mortgage Trends also warns that “economist projections are often wrong”, although “they are still one of the better sources of educated opinion on interest rates.”
Among the forecasts presented are:
- Overnight Rate Forecast
(Bank of Canada’s overnight target has a direct impact on variable mortgage rates) - 5-Year Government Bond Yield Forecast
(Government bond yields are major drivers of fixed mortgage rates) - Variable-Rate Mortgage Forecast
(On average, major economists now expect a 150 basis point increase in the overnight rate over the next 16 months) - Fixed-Rate Mortgage Forecast
(Banks foresee 5-year bond yields climbing 127 basis points in the same 16-month timeframe)
Please visit Canadian Mortgage Trends website to view the full reports, but take into account that the forecasts are made by the banks and are subject to frequent change. Data Sources come from BMO, CIBC, RBC, Scotiabank and TD.
Please always discuss your needs and risk tolerance with a mortgage professional before acting on any information you read online. History has shown that it’s near impossible to accurately predict interest rates long-term so remember to use these predictions only as a rough guide because rate outlooks have considerable margins of error.
Continuing weakness in the U.S. economy may force the Bank of Canada to put interest rate hikes on hold after September, notes a new report from CIBC World Markets Inc.
“North America’s story is again darkening,” says CIBC’s Chief Economist Avery Shenfeld in the latest Global Positioning Strategy report. “We were looking for a material second-half slowdown for the U.S. but as it turns out, it’s already happened.”
Economic growth stateside from April to June is being revised downward, Mr. Shenfeld notes, and key indicators are pointing to growth that will be slower than anticipated by U.S. monetary policy makers.
And still ahead is a “further fiscal belt tightening in 2011 that will have to be softened, and accompanied by quantitative easing, if the U.S. is to stay out of recession in early 2011 and get back to potential growth by the end of that year.
“Forget about any rates hikes from the U.S. Federal Reserve until sometime in 2012 at the earliest.”
While Canada is in much better economic shape – it leads the U.S., Eurozone, U.K. and Japan in first-half growth and has a record gap over the U.S. in the share of working age population holding a job – it “cannot move all the way to normalized interest rates while the U.S. Federal Reserve is still on hold,” Mr. Shenfeld contends.
For starters, an interest rate differential of 300-400 basis points would take the loonie “substantially stronger” creating additional headwinds for Canadian economic growth, says Mr. Shenfeld.
Furthermore, the “external environment will be one of less-than-normal growth as fiscal tightening bites in Europe and the U.S., and with our own upcoming fiscal tightening also hitting domestic demand, monetary policy might have to be set at stimulative levels to allow the economy to return to potential and remain there. To keep moving at all, you have to step on the gas if your car is trying to roll up a steep incline.”
Mr. Shenfeld doubts that the Bank of Canada “has been shocked enough to forestall a rate hike in September” but his forecast that Canadian growth in Q2 and Q3 will fall below the BoC’s outlook will likely warrant a rethinking in the October Monetary Policy Report and in the months to follow.
The report also notes that there are limits to how far the Bank of Canada can diverge from the U.S. Federal Reserve without later regretting it. Episodes in recent years in which rate overnight rates were 2 per cent or more above those stateside resulted in sagging or sacrificed growth. These are “lessons learned, we hope,” says Mr. Shenfeld.
“Since a hike at every rate setting date through 2011 would take rates substantially higher than 2%, a pause is coming on the road to tightening.”
As a result of the dampened external growth outlook, Mr. Shenfeld has trimmed his call for rate hikes. He sees Canadian overnight rates going no higher than 2% next year as the U.S. Federal Reserve stays on hold.
A less hawkish monetary policy combined with a mixed outlook for commodity prices affected by slow global growth will also likely see the Canadian dollar roughly two cents weaker than earlier forecast over the same horizon, adds Mr. Shenfeld.
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/gps_aug10.pdf
CIBC World Markets Inc. is the corporate and investment banking arm of CIBC, a premier client-focused and Canadian-based wholesale bank, that provides a wide range of credit, capital markets, investment banking, merchant banking and research products and services to government, institutional, corporate and retail clients in Canada and in key markets around the world.
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.