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Prime Rate Update: July 20th, 2010 - Increase by 1/4 percent

Article by Mike Averbach of Averbach Mortgages.

The Bank of Canada hiked its key interest rate by a quarter point today, for the second month in a row and so the big 5 banks will most likely follow by raising prime to 2.75%.

With every 25 basis point increase you can expect $12-$15 dollars per 100,000.00 in mortgage amount. Basically, if you have a 400,000.00 mortgage, your payment will increase by as much $60/monthly.

In its statement the Central Bank noted that it “expects the economic recovery in Canada to be more gradual than it had projected in…April, 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.”

“It was a pretty dovish statement, more than we expected. But they still referred to rates still being at stimulative levels, so we think they’ll raise rates at each of the next two meetings in Sept. and Oct., by 25 points each,” before pausing in December as the economy slows, said Krishen Rangasamy, an economist with CIBC World Markets in Toronto. Without a move towards higher rates, “you risk having inflation running out of control.”

Fixed rates have seen little pressure to increase in the past 6 weeks and it’s surprising to me that they haven’t come down even further based on the bond yield spreads that just seem to keep growing and keeping the big banks happy.

Here is a link to the current fixed rates offered:
Have a look at the Globe and Mail article below for a brief overview of what is happening in the market and where things are heading:

Mark Carney hikes rates, but cuts outlook

Jeremy Torobin

Ottawa — Globe and Mail Update Published on Tuesday, Jul. 20, 2010 9:05AM EDT

The Bank of Canada Tuesday raised its benchmark lending rate for the second consecutive month while cutting its forecast for economic growth this year and next as austerity measures in Europe and economic fits and starts in the United States make for a slower global recovery and a “more gradual” Canadian rebound.

In the statement on their decision to lift the overnight rate by one-quarter of a percentage point to a still low 0.75 per cent, Bank of Canada Governor Mark Carney and his rate-setting panel reiterated that future moves will depend on developments around the world and, in turn, how they may impact Canada’s export-heavy economy.

Canada’s economy will grow at a 3.5 per cent annualized pace this year instead of the 3.7 per cent rate that policy makers projected in April, and 2.9 per cent next year instead of 3.1 per cent, the central bank said. The following year, however, the domestic economy will grow at a 2.2 per cent pace instead of the 1.9 per cent predicted in April.

The scaled-down outlook pushed the Canadian dollar lower, a rare occurrence after a rate hike, and also tempered investor expectations for future increases.

``The Bank now has more wiggle room to raise rates on a more cautious tact if they want to,’’ Michael Gregory, a senior economist at BMO Nesbitt Burns, said in a note to clients. ``And, we think they will.’’

Economists including Mr. Gregory noted that there is probably enough momentum in the domestic economy to justify another rate hike or two before the end of the year, pointing to factors such as the fact Canada has had record job growth in two of the past three months. Still, Mr. Gregory said, ``this assumes that domestic economic data will reflect these employment gains and we get no major flare ups on the European or American risk fronts in the meantime.’’

A flurry of belt-tightening measures in Europe have lowered the risk of an ``adverse outcome’’ to the continent’s debt crisis and raised prospects for ``sustainable long term growth,’’ but will slow the worldwide turnaround, the central bank said. Also, in the United States, Canada’s main export market, the bank said private demand is ``picking up but remains uneven.’’ Indeed, housing starts in the U.S. last month fell to the lowest level since October, the Commerce Department said Tuesday, and confidence among American consumers is plunging amid high unemployment.

The global recovery, the bank said, ``is proceeding but is not yet self-sustaining,’’ and will be restrained as households, banks and governments in the so-called advanced economies work to get their finances under control.

The Canadian revisions -- which will be explained more in a new forecast that the central bank will release on Thursday -- are due to ``a slightly weaker profile’’ for global growth but also to ``more modest consumption’’ domestically as the housing market cools, government stimulus spending runs out and business investment remains tepid, the bank said.

``Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments,’’ the central bank said, using identical language from its statement on June 1, when it became the first in the Group of Seven to raise borrowing costs since the recession.

Investment by Canadian companies ``appears to be held back by global uncertainties’’ and hasn’t bounced back from a sharp drop during the recession even as many firms are hiring, the central bank said. Without being more specific, policy makers said that over their projection period they anticipate business investment and net exports will make a ``relatively larger’’ contribution to economic growth -- a hint that the domestic consumption that powered Canada’s economy out of the recession can’t be relied on as much to fuel the recovery going forward.

Inflation will stay near the central bank’s 2-per-cent target throughout the projection period, policy makers said, but the economy won’t return to full capacity until the end of 2011, or six months later than they had forecast in April.

The next scheduled date for announcing the overnight rate target is 8 September 2010.
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