Higher interest rates could be coming sooner, says Bank of Canada governor

By Julian Beltrame, The Canadian Press

OTTAWA – Canadians could be facing higher interest rates sooner than previously thought as a result of stubborn inflation and stronger economic growth, Bank of Canada Mark Carney said Wednesday.

Carney did not declare higher rates were on the way, but issued his clearest signal to date that his year-old commitment to keep the policy rate at the record 0.25 per cent until July was “expressly conditional” on inflation remaining tame.

In a speech to a business audience, the bank governor noted that both underlying core inflation and economic growth have grown slightly stronger, although broadly proceeding as expected.

The tip-off to economists was that he changed his language on his conditional commitment on interest rates, which has led to historically low rates for both consumers and businesses in Canada and helped the country recover from recession.

“This commitment is expressly conditional on the outlook for inflation,” he told the Ottawa Economic Association.

It was the first time Carney has undercut the commitment in such pointed language.

Later, Carney downplayed the significance, joking with reporters that he needed to used different words to keep the media’s attention.

But economists said the distinction was significant.

“They still have considerable latitude, but the changes that would be required to their forecast are consistent with hiking rates sooner than markets are anticipating,” said Derek Holt, Scotiabank’s vice-president of economics. He said Carney may move as early as June 1.

But Holt stressed that Carney’s overall message to Canadians is that rates will remain low by historical standards for some time.

“No matter what, we emerge from this with lower rates at the end point of the hiking campaign than in past cycles. He’s saying the outlook is clouded with risks and there’s a number of reasons to expect growth to be lower than past cycles.”

Core inflation – which excludes volatile items like energy – has been stubbornly sticky the past few months, with the index rising to 2.1 per cent in February. That’s the first time it has been above the central bank’s target of two per cent in more than a year.

And Carney pointed out that the economy has performed better than he thought when the bank issued its last forecast in January, predicting growth of 2.9 per cent this year. Since then, several private sector economists have increased their projections and Carney is expected to do the same at the next scheduled forecast date on April 22.

At a news conference following his speech, Carney warned against reading in too much optimism in his assessment.

“It wasn’t that rosy a message,” he said.

He cautioned that low U.S. demand and the high Canadian dollar, which was trading below 98 cents US on Wednesday but still high by recent standards, were acting as “significant drags” on the economy.

On a longer term basis, Carney’s message to Canadians was positively dark, warning that the country needs to address its “abysmal” productivity record and that the world needs to follow through with reforms to address global imbalances, particularly China’s undervalued currency.

Carney calculated that unless the country improves its productivity or output per unit of work, Canadians can expect to lose a total of $30,000 in real income over the next decade.

“Canada does underperform,” he said. “We are not as productive as we could be. Our potential growth is slowing. Moreover, this is occurring as the very nature of the global economy … is under threat.”

Canada’s productivity has advanced a meagre 0.7 per cent annually over the last decade, he noted, less than half the rate in the U.S. and half the rate Canada managed between 1980 and 2000.

He placed the blame on the doorstep of Canadian business, which he said needs to make much bigger investments in equipment and machinery and in information technologies.

Canadian workers have about half the information and communication technology at their disposal as their American counterparts, he said, adding that changes must be make quickly because the landscape of the global economy has shifted and it requires a “big response.”

Carney also said a key to future prospects for the Canadian and global economies is adoption of the G20 framework for economic sustainability. That will require addressing global imbalances which, in part, are caused by fixed currencies like China’s yuan which are kept artificially low to boost exports and discourage imports.

He produced a chart showing that unless the G20 measures are adopted, global growth will be about one percentage point lower in the next five years than it might otherwise be. The worse case scenario is a prolonged global recession that triggers protectionism, deepening the crisis. The irony, he said, is that China loses out in the long run as well.

Carney is the second Canadian policy-maker in as many days to warn about the devalued yuan. On Tuesday, Finance Minister Jim Flaherty said Canada will push the issue at the upcoming G20 meetings in Toronto in June. A revaluation of the yuan would likely lead to adjustments in other fixed currencies in Asia, economists said.

The U.S. has taken the lead in pressuring China on the yuan, but so far the emerging economic superpower has dismissed such calls and said it would move on its own schedule.

“An adjustment in global exchange rates is part and parcel of global rebalancing,” said Carney. “What’s at stake here is enormous and the adjustment of those real, effective exchange rates of all major currencies is an important component of rebalancing.” http://ca.news.finance.yahoo.com/s/24032010/2/biz-finance-higher-interest-rates-coming-sooner-says-bank-canada.html

Consumer credit experts call on homebuyers to exercise caution

The Canadian Press

TORONTO — Potential homebuyers spurred into action by fears of an imminent interest rate hike may be better off to wait and avoid bidding wars that can prove even more costly, according to consumer credit experts.

Laurie Campbell, executive director of Credit Counselling Canada, says Canadians already feeling societal pressure to be homeowners are more likely to engage in bidding wars and overspend when they hear that their ability to fulfil that “North American dream” could soon erode.

“We’re not only enticed by agents and those who market mortgages and the whole concept but … society as a whole,” she said.

The hot housing market is being driven, in part, by an influx of consumers willing to pay a premium for home ownership before interest rates rise.

“They’re overpaying for houses because they’re all trying to get into the market before interest rates go up,” Campbell said. “Especially right now with this whole time bomb of interest rates, for sure there’s a lot of people out there thinking they better get in the market today.”

Two bank surveys released Wednesday found that potential homebuyers are feeling pressure to buy homes sooner, but are worried about their ability to pay for their homes when mortgage rates rise.

The Bank of Montreal said as many as one-third of respondents in a homebuyers survey believe their expectation that housing prices would increase, and interest rates would soar, left an impression on their decision to make a purchase in the short term.

About 15 per cent of potential homebuyers said they have been in bidding wars, and for those who had their housing bids rejected, 14 per cent believe it caused them to overspend on their next offer.

“There’s definitely a sense of urgency among home buyers,” said Lynne Kilpatrick, senior vice-president of personal banking at BMO.

“While we encourage Canadians to pursue their home ownership dreams, we recognize it’s easy to get caught up in the emotions of the purchase and this can lead to stretching one’s budget too thin.”

Meanwhile, Royal Bank’s annual home ownership survey found about 64 per cent of mortgage holders are concerned about higher rates over the next year. Almost three-quarters of homeowners, 73 per cent, felt strongly that homebuyers needed to think ahead to ensure they will still be able to make their mortgage payment if rates rise.

The bank said six in 10 mortgage holders said they had taken advantage of current low interest rates to pay more principal on their loans.

Most economists say low interest rates are behind the continued strength in the housing market and expect the Bank of Canada to raise interest rates in late spring or early summer.

The cost of servicing a mortgage fell 5.8 per cent in February as a result of record-low interest rates, but with many Canadians taking on ever larger mortgages in expensive markets across the country, higher rates could create problems for some.

BMO’s senior economist, Sal Guatieri, says that with a cooler housing market “just around the corner,” prudence may be a good choice for many new entrants. http://news.therecord.com/Business/article/688274

Despite 2010’s strong start, Scotiabank expects the “twenty-tens” Canadian housing market to pale in comparison to the previous decade.  

Cost of owning a home up slightly in late 2009; will continue to rise: RBC
Sunny Freeman , The Canadian Press

TORONTO – Home prices will continue to rise this spring as buyers scramble to close deals ahead of expected higher interest rates, new mortgage rules and new taxes in two key markets.

A report by RBC Economics issued Monday found that the cost of owning a home in Canada increased slightly across all housing segments in the closing months of 2009.

Strong demand, fuelled by exceptionally low mortgage rates, has increased competition for the limited supply of homes for sale, which continues to drive prices up, the report said.

RBC senior economist Robert Hogue said the problem is likely to get worse with an anticipated rise in interest rates in the second half of the year.

The Bank of Canada has pledged to keep its key overnight rate at 0.25 per cent, where it has been since last spring, until the end of the second quarter. But economists anticipate it will begin rising as early as July.

Historically low interest rates have been cited among reasons for the strong housing market, with sales of existing homes moving higher again in February and setting monthly records in both Ontario and Quebec.

The Canadian Real Estate Association said 36,275 homes were sold across the country in February, up 44 per cent from the same month in 2009, when the recession was still impacting both consumer optimism and loan activity.

But February’s year-over-year gain was much smaller than in the previous three months, CREA said. Part of the reason was that February home sales were down in Vancouver as the Olympics impacted activity there even as sales in Toronto logged an equally large gain.

Overall, seasonally adjusted home sales were down 1.5 per cent in February compared with January.

Economists predict that real estate markets in B.C. and Ontario will remain hot in the months prior to the introduction of the harmonized sales tax in those provinces on July 1, which will increase the transaction costs associated with a home purchase.

Douglas Porter, deputy chief economist at BMO Capital Markets, said some buyers in Ontario and B.C., which combined account for over half of national sales, are advancing their purchases to avoid paying the HST.

“It’s no coincidence that Ontario and B.C. have seen the biggest gain in sales in the country,” he said.

CREA chief economist Gregory Klump said buyers in those provinces are driving national sales activity higher in the first part of the year.

“It should remain a tight market with negotiations favouring the seller in a number of major markets in the first half of this year,” he said.

Klump said that strong resale housing demand continues to draw down inventories, but softer sales activity and an increase in new listings in recent months has helped slow the depletion of available properties.

“Those sellers who moved to the sidelines at the depth of the recession will be putting their homes back on the market in response to headline average price increases,” he said. “

Porter said the increase in supply from ultra-low levels helps bring the market closer to balance, but that the still-tight market means prices will remain high.

“We’re going to get a very hot market in the next few months but it won’t overheat,” he said.

“I think we’ll get one more wave of relatively strong numbers over the spring and then we’ll crest and the market will come off the boil in the second half of the year.”

He added that Ottawa’s recent efforts to “release some steam from the market” will help slow activity, and “the housing market will pull up just short of bubble territory.”

Finance Minister Jim Flaherty announced new mortgage qualification rules last month to discourage homeowners from taking out mortgages on homes they might not be able to afford down the road when rates return to more normal levels.

In order to qualify for an insured mortgage, borrowers will have to meet the standards for a five-year, fixed-rate mortgage even if the period they choose is shorter and the interest rate they pay is lower.

Porter said the changes will prompt those affected – primarily first-time buyers and investors – to buy in advance of the new rules, and bump up sales in March.

Still, other buyers could be hesitant to enter the frenzied market this spring and may tolerate a small spike in interest rates and wait for conditions to cool off, he said.

“Some cooler heads will decide they can get a better deal in the second half of the year even if it does come at a higher interest rate.”

The Flaherty effect

Helen Morris, National Post 

Many of us have been enjoying supremely attractive interest rates on mortgages. However, with rates having been at historic lows for quite some time and with the economy heating up, the only direction rates will go from here is up. The finance minister wants to ensure borrowers are in good financial shape to withstand rate hikes, which are expected to hit this summer.

Finance Minister Jim Flaherty announced that by April 19 new mortgage criteria will apply. Lenders will now be testing whether buyers can afford a mortgage using a higher interest rate. The new rules apply to mortgages backed by government insurance, a requirement when there is less than a 20% deposit.

“What will tend to happen is that the same practices will cascade through the entire financial system. So when borrowers come in to take out mortgages, they all will be tested against the five-year posted rate,” says Craig Alexander, deputy chief economist at TD Bank Financial Group. “It increases the qualifying interest rate by about one percentage point.”

The higher rate will be used just for the qualifying process – it does not mean your mortgage rate will be higher – at least not right now.

“Any mortgage professional that’s worth their salt is sitting down with their client already and saying, ‘Can you afford a 1% or 2% rate increase?’ ” says Jim Rawson, regional manager of Invis mortgage brokerage firm in Toronto. “We tend to want to have those customers looking forward. If they’re stretched to their maximum at today’s low interest rates, then there could be some financial considerations two years down the road if indeed they have to take a look at higher interest rates.”

So, if there’s an April 19 deadline, won’t that make it more tempting to try to get a mortgage now?

“Folks shouldn’t rush to buy; you don’t want to get caught up in the potentially emotional period that might go on between now and April 19. If you can wait, I would suggest waiting,” says John Turner, director of mortgages, Bank of Montreal. “It’s important for the potential consumer to sit down with their banker and get prequalified. They want to lock in their interest rate so they can take their time and make the right decision. They want to make sure that they can afford the house that they are buying.”

Mr. Alexander says about one-quarter of those looking to purchase a home will likely be affected by the new rules and may have to settle for a smaller home, but he estimates only 4% or 5% will not buy because of the tighter qualification process.

Under the new rules, existing homeowners will only be able to withdraw 90% of the value of their homes when refinancing, down from 95%.

“People who would be looking for [high refinancing] are probably in some sort of financial strife already, so it’s probably something they shouldn’t be doing,” Mr. Rawson says.

The third set of property owners in Mr. Flaherty’s sights are those looking to invest in rather than live in a home.

“People buying a property they are not going to live in now have to put 20% down; before, it was 5% down. That’s a really big change,” Mr. Alexander says. “That measure is really aimed at speculators. The government said specifically the objective was to diminish speculation in the marketplace.”

The new requirement may affect the Toronto condo market, Mr. Alexander says.

“Demand growth will probably be tempered by some of these new rules. … If there were people looking to buy a couple of extra condo properties as an investment … it doesn’t mean people can’t do it but if you’re going from 5% to 20%, instead of buying four properties with the same amount of money, maybe you end up buying one.”

The new rules plus more new condos coming on stream may cool the market, Mr. Alexander says, but adds that the Toronto real estate market remains fundamentally strong with demand boosted by immigration.  Read more: http://www.nationalpost.com/homes/story.html?id=2672369#ixzz0iFKKWN5M
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75 years on, Bank gets it right on inflation

William Watson, Financial Post 

Seventy-five years ago Thursday the newly constituted Bank of Canada took over responsibility for Canada’s currency. It was supposed to have done so 10 days earlier but British American Bank Note Co. was late with its initial delivery of cash.

Since 1935, when the Bank came into being, prices in Canada have risen 16-fold. What costs $100 now would have cost just $6.25 then. It makes you wish the banknotes had been delayed a lot longer.

Those numbers, by the way, are from the very handy inflation calculator on the Bank of Canada’s website. You don’t really want your central bank to be good at tracking inflation. You want it to be good at crushing it. The bank took about 50 years to catch on, but it’s now reasonably good at what it’s supposed to do.

To be fair, in evaluating its performance the important question is “compared to what?” Until 1935, money matters were handled by the currency branch of the Department of Finance, which handed out “Dominion notes” in exchange for gold, and vice versa, and occasionally encouraged the private banks to take on more liquidity by lending them notes against financial securities, though charging them interest of 5% for the privilege. Many banks also issued their own notes, which caused problems when the public lost confidence in a given bank.

During the Depression, elite opinion became convinced that Finance should give responsibility for money and monetary policy over to a more expert and independent central bank of the sort most other countries now had, the United States since 1913.

On July 31, 1933, Prime Minister R. B. Bennett empanelled a five-person Royal Commission-two Brits, including its chair, Lord Macmillan, two bankers and the premier of Alberta. It held its first meeting eight days later and reported 50 days after that. In a 3-2 split, with a majority of the Canadians and, politically conveniently, both bankers opposed, it recommended the institution of a privately-owned central bank. (Mackenzie King was to nationalize it in 1938.)

Just a year and two days after the commission’s appointment Parliament approved the Bank of Canada Act. There was no national productivity problem then: things got done. Two months later Prime Minister Bennett named the first Governor, Graham Towers, assistant to the general manager of the Royal Bank and a Montrealer trained in economics at McGill by none other than Stephen Leacock and seven months after that the Bank made its first transactions.

In the crisis of the last two years the Bank has ventured into what it sees as unorthodox areas of lending and investment. But it began in unorthodoxy. In 1936 it bailed out Alberta and Saskatchewan when they threatened to (and in Alberta’s case eventually did) default on their bonds. In 1938 Governor Towers took charge of the newly-created Central Mortgage Bank, which was designed to help struggling mortgage-holders. During the war the Bank supervised exchange controls and Towers did secret planning for how to keep finance going if the Nazis over-ran Britain. (Make the Canadian dollar the Empire’s new reserve currency was one possibility).

The worst inflations of our central bank era occurred in the late 1940s and the 1970s. In both cases it’s easy to sympathize with the governor of the day. During the war, Canadians lent their government hundreds of millions of dollars in Victory Bonds. Most such bonds paid 3% or less. Had the Bank done what it probably should have and raised interest rates to stem the postwar boom, the value of all those bonds would have crashed: If new bonds pay 6% what are old bonds that pay 3%? Half their original value. Towers, who had run several Victory Bond campaigns, felt a moral obligation not to destroy bond-holders’ savings. Ironically, the inflation that resulted may have induced him to leave the Bank. In 1935 his salary had been a majestic $30,000 a year. By 1955, when he quit, it was $50,000 but only $25,641 in inflation-adjusted 1935 dollars. And taxes were a lot higher.

The inflation of the 1970s is also understandable. Keynesian textbooks didn’t say what a central bank was supposed to do when a cartel jacked up the price of oil by several hundred percent. The stagflation that followed stumped policymakers. Milton Friedman’s monetarism did have a theoretical answer: keep the growth of money low and constant and inflation will be low and constant. Send a steady flow of liquidity into one end of the hose that is the economy and you’ll get a steady flow of real economic activity out the other end. It’s certainly plausible. But when Bank Governor Gerald Bouey tried it in the late 1970s it didn’t work. The hose turned out to be unpredictably elastic. Sometimes it sucked up liquidity and produced no growth. Other times just a little liquidity brought gushing growth.

Not until the late 1980s and the governorship of the, at the time, much disliked Governor John Crow, did the Bank start directly targeting inflation with a clearly defined “reaction function” (if inflation does X, we do Y: everybody got it?).

That strategy worked pretty well for two decades. Between 1990 and 2010 prices increased by only 50%. That’s not fantastic but no 20 years since 1935 have been better.

After three score years and 15 the Bank seems finally to have figured things out. Let’s all tip our hats to R. B. Bennett.

Regular reviews of your mortgage ensure your loan is still right for your financial situation

by Malcolm Morrison, THE CANADIAN PRESS
TORONTO – Buying a home is probably the most expensive purchase you will ever make and if you’re like the vast majority of Canadians, you used a lot of borrowed money to experience the joys of home ownership.

Because you have to pay interest on a loan over years and decades, that means you will end up paying a lot more money for your house or condo than what you paid the seller.

You have to take advantage of every break to reduce your mortgage balance and the amount of time it will take to pay off your home. And that means it’s a good idea to take a good hard look at that loan at least once a year.

“There’s a lot of things that people don’t actually think about,” said Jim Rawson, regional manager for mortgage broker Invis in Toronto. For starters, he thinks it is a good idea to keep a mortgage table handy just to remind you how much you’re actually paying for that house.

“And you should take a look at it every year and take a look at where you are on it and how much you paid down,” he said.

One of the most obvious things you can do – and will shave years off your mortgage term – is make sure you are not paying in monthly installments.”You can switch to weekly or bi-weekly and generally most institutions will allow you to do that.” Doing so amounts to an extra monthly payment every year. Also, most mortgages are built with an annual pre-payment feature.

“And if you can make a portion of that, any portion of it, you’re obviously going to be saving some interest,” said Rawson.

Many institutions will allow you to pre-pay at least 15 per cent of your principal balance every year. (MERIX allows 20%)

You may not be able to come up with a huge amount of money every year. But even nibbling away at the balance can carve years off the payment term.

“Ten dollars (a week) is not going to make a huge difference (to you) – but $10 a payment can make a difference,” said Rawson.

“And you know a lot of people are getting raises every year, or every couple of years and if they were to apply even a portion of their raise to their mortgage, they would be saving a lot of money over the course of their mortgage.”

You may also be thinking of embarking on a major renovation for your kitchen or bathroom or slapping on a new roof.

Many would go the home equity loan route but instead, you could just add the cost to your mortgage for a lower interest rate.

“Absolutely, if you have enough equity built in to your home right now and you’re looking at a major renovation, certainly refinancing and adding, increasing your mortgage amount can certainly be a very cost-effective way of borrowing for that renovation,” said Charles Lambert, Managing Director, Mortgages, at Bank of Nova Scotia.

“You look at it in terms of relative size of the renovation that you want to do – I’m not sure you want to (do this) if you’re repainting your house or something like that.”

Instead, he said, a line of credit could be the appropriate way to do a smaller project. And here again, you can use your home as security for a line of credit.

“You can borrow up to 80 per cent of the value of your home,” said Lambert.

Secured lines of credit generally charge a point or two above the prime rate.

You could also think about consolidating debt like a credit card balance to a lower rate by tacking it onto your mortgage. But don’t use it as an excuse to rack up more debt.

“One of the key things that I always advise clients about is if they’re going to pay off credit cards by refinancing your mortgage, you better be cutting up those credit cards,” said Rawson.

“It doesn’t mean you can spend some more money because that’s not going to help at all.”

Finally, mortgage interest rates are at extremely low levels now – but they won’t stay that way and economists expect the Bank of Canada to start hiking rates later this year.

So for peace of mind, homeowners on a variable rate might want to opt for something fixed right about now.

“If you’re looking for long-term stability, then you’re probably taking a look at trying to do something fixed for five years or so,” said Rawson.

But, historically, rates fluctuate and at some time in the future, you may find that it makes sense to break your mortgage so you can take advantage of a lower rate, despite a high penalty.

For example, Scotiabank would charge you the greater of three months’ interest on the mortgage balance or the interest rate differential.

“Sit down with a mortgage pro, they can work out for you whether it makes sense or not,” added Rawson, adding if you can save yourself two percentage points over the next five years, you’re way ahead.

http://ca.finance.yahoo.com/personal-finance/article/cpmoney/regular-reviews-your-mortgage-ensure-your-loan-still-right-your-financial-situation-20100225

Budget 2010: A second year of stimulus spending

Paul Vieira, Financial Post 

OTTAWA — The Conservative government sketched out on Thursday its initial plans to return to budget balance, by targeting cuts in the public service, a freeze on foreign aid, limited growth in military spending and higher EI premiums.

The spending restraint, outlined in its 2010 budget, would net $17.6-billion in savings over five years and bring the deficit down from a high of $53.8-billion this fiscal year, ending March 31, to a low of $1.8-billion by 2015.

Before the cuts kick in, however, the Conservative government said it was committed to spend $19-billion as part of year two of the two-year $47-billion stimulus package aimed at resuscitating the economy after the global financial crisis.

The 451-page budget sets out how the Conservatives plan to meet all its goals — of creating jobs and bolstering Canada’s long-term competitiveness, while at the same time returning to surplus without tax increases, nor cuts to transfers to provinces and individuals. The government also said it would go through with cuts to corporate income taxes, from 19% to 15% by 2012, despite calls from opposition politicians to cancel them and use the money to help seniors and the poor.

“We are building Canada’s reputation as an investment-friendly country,” Finance Minister Jim Flaherty said in his budget speech. “A country committed to free and open trade, unburdened by massive debts and [the] higher taxes of our competitors.”

All the opposition parties vowed to vote against the budget — although Liberal Leader Michael Ignatieff said his party would not bring down the government and force an election by withholding the number of Liberal MPs who show up to vote.

Even though Canada’s economy is recovering at a rather robust clip of late — 5% growth was recorded in the final quarter of 2009 — Mr. Flaherty said following through with more stimuli is the right thing to do as the global recovery is in its nascent stages.

Measures linked with the stimulus plan will expire as of March next year, and with it comes a plan to return to budget balance.

Overall, analysts said the budget struck a fair balance between adding momentum to the recovery from a deep recession, and preparing the economy for fiscal restraint.

“It is not a dramatic change of course, and in uncertain economic times you want a steady hand. And we are getting a steady hand,” said Craig Wright, chief economist with Royal Bank of Canada.

For some, such as the NDP, there wasn’t enough money to help the unemployed or the poor. Others said there wasn’t enough on the spending-cut side.

“A plan to balance the budget should actually balance the budget and this doesn’t do that,” said Kevin Gaudet, federal director of the Canadian Taxpayers Federation. “Restraint delayed is restraint denied. Taxpayers have heard similar promises of restraint before. Canadians will believe it when they see it.”

There were some new spending measures, although minor, such as extending a work-sharing program at a cost of over $100-million, and eliminating all tariffs on imported industrial inputs at cost of $1.2-billion over five years.

According to the government’s plan, the $53.8-billion deficit will be cut in half in two years time, and by two-thirds in three years. Much of that will be due to allowing the stimulus plan, and its associated measures, expire in March 2011.

The government envisages robust growth in revenue, starting in the 2010-11 fiscal year, and will grow thereafter based on, among other things, four consecutive years of higher Employment Insurance premiums, which business leaders describe as a payroll tax.

Economists at Toronto-Dominion Bank have calculated that EI premiums will rise from the present $1.73 level to $2.33 by 2015, in an effort to return the EI account to balance. As a result, that will contribute nearly one quarter to the overall improvement to federal revenue over the next half decade, they said in a note.

On spending, the government will introduce legislation to freeze the salaries of all MPs and Senators for the next three fiscal years.

Also, Ottawa is eyeing $6.8-billion in savings through containing the operating costs of federal departments. Departments’ operating budgets will be frozen in 2011 and 2012 at 2010 levels. Further, a 1.5% wage increase owed to unionized workers in 2010, at a cost of $300-million, has to be funded through cuts within departments.

The government also plans to cap growth in defence spending, which doubled to $20-billion in the previous decade. Restraint doesn’t begin until 2012, and the efforts aim to achieve savings of $2.5-billion by 2015. Meanwhile, foreign aid will reach $5-billion this coming fiscal year, and increase no further, and be subject to review on a year-by-year basis.

Overall, after the stimulus package expires, program spending is set to increase at on an annual basis of between 1.5% and 2.5%. This could be quite the feat, as prior to the recession program spending grew at roughly 6% to 7% a year.

Douglas Porter, deputy chief economist at BMO Capital Markets, said the government’s plan is banking on a well-entrenched U.S. and global economic recovery as of next year to smooth the way toward stimulus removal.

“The big question mark is whether the economy can withstand the abrupt removal of stimulus a year from now,” he said. “To me, that’s the real test.”

The budget’s underlying forecast envisages economic growth of 2.6% this year (below the Bank of Canada’s forecast), 3.2% in 2011 and 3% in 2012.

At a media conference during a lockup for reporters, Mr. Flaherty said if the economic growth projections fell short, his government was prepared to “do more” in terms of spending restraint. http://www.financialpost.com/news-sectors/story.html?id=2636923

Budget Highlights

Projected deficit for current year (2009-10): $53.8-billion

• Deficit for 2010-11: $49.2-billion

• Total spending: $280.5-billion

• Program expenses: $249.2-billion (an increase of 4.7% over 2009-10)

• Debt charges: $31.3-billion

• Total infrastructure project spending: $7.7-billion

• Elderly benefits: $36.7-billion

• EI benefits: $22.6-billion (compared with $16.3-billion in 2008-09)

• Health and social transfers to provinces: $37.1-billion

• Transfers to municipalities: $2-billion

• Total federal debt: $566.7-billion

• Personal income tax to be collected: $117-billion

• Personal income tax cuts: $3.18-billion

• Corporate income tax to be collected: $22.3-billion

• Total excise duties and GST to be collected: $188.9-billion

• Savings from “containing administrative cost of government”: $300-million

• Administrative savings, 2011-12: $900-million

• Savings from “closing tax loopholes”: $355-million

• Total increase in funding for scientific research and post-secondary education: $1.88-billion

Economy improving, but interest rates to stay at historic lows for now

By Julian Beltrame, The Canadian Press

OTTAWA – The Bank of Canada is keeping interest rates at historic lows for a few more months, while sending out signals that the economy is rebounding strongly and could trigger inflationary pressures.

The central bank’s more positive take on the economy followed a Statistics Canada report Monday of a surprising five per cent growth spurt in the fourth quarter of 2009 and sent a strong loonie even higher.

“The level of economic activity in Canada has been slightly higher than the bank had projected in January,” the bank said Tuesday morning before markets opened.

“The economy grew at an annual rate of five per cent in the fourth quarter of 2009, spurred by vigorous domestic spending and further recovery in exports.”

“Slightly higher” may be an understatement, as the bank had projected growth of only 3.3 per cent for the last three months of 2009.

The bank also noted that “core inflation” has been slightly firmer than projected, although it added that some of the price increases were due to transitory factors.

The governing council continued to reiterate that despite the improved conditions, they would likely leave the overnight rate where it has been since last spring – at 0.25 per cent – until at least July.

But some economists weren’t buying it and the reaction of money markets suggested that there may be some pressure on governor Mark Carney to move on interest rates ahead of schedule.

“They are getting ready to take away the punch bowl,” said Derek Holt, vice-president of economics with Scotia Capital.

“I think they are priming the markets for a second-quarter hike.”

The next interest rate announcement comes in April, but June would be a more likely time to move, said Holt, if indeed the bank is preparing to act. http://ca.news.finance.yahoo.com/s/02032010/2/biz-finance-economy-improving-interest-rates-stay-histori

Paul Vieira, Financial Post   

OTTAWA — Pressure on the Bank of Canada to move early on raising interest rates mounted Monday after data on fourth-quarter gross domestic product suggested the economy is roaring its way out of recession after recording the fastest pace of growth in nearly a decade.

The central bank could provide hints of a change Tuesday morning when it releases its latest statement on interest rates. Its plan for almost a year has been to conditionally keep its benchmark rate at 0.25% until July in an effort to pump up economic growth after the great recession.

Data from Statistics Canada suggest the emergency-level rates have worked their magic, perhaps faster and better than anticipated.

The economy expanded 5% in the final three months of 2009, blasting past market expectations for a 4% gain – and the bank’s own 3.3% forecast – and setting the stage for robust growth this quarter. It is also the fastest pace of quarterly economic growth since late 2000. Further, the data were solid across the board, with personal consumption and net trade contributing to the performance.

Third-quarter data were also revised upward, with growth of 0.9% as opposed to the original 0.4% reading.

This comes on top of January inflation data that indicated price increases have moved closer to the central bank’s 2% target earlier than envisaged.

“With growth being stronger than expected and inflation sticky … we remain of the view that the Bank of Canada has the full green light to hike as emergency conditions have passed and with it justification for sticking to the zero lower bound on rates,” said economists Derek Holt and Karen Cordes from Scotia Capital.

Yanick Desnoyers, assistant chief economist at National Bank Financial, said a rate hike could come as early as next month, when data might show the output gap – or the amount of slack in the economy – is narrowing faster than the central bank expected.

He added the headline GDP data might be underestimating how quickly economic slack is being absorbed. For instance, gross domestic income – or the sum of all wages, corporate profits and tax revenue – climbed by 8.5% in the quarter, the best showing since 2005. And that follows a 4.5% gain in the third quarter.

Sheryl King, chief economist and strategist at Bank of America/Merrill Lynch Canada, said she expects a rate hike in June, based on a belief the central bank will want to see through its conditional pledge for as long as possible.

Among the data points she said she found most encouraging was a 4% gain in real wage growth – defined as gains in household income excluding transfers from governments. The last time there was growth in this category was prior to the recession.

“This signals that risk taking and organic growth is coming back in Canada,” she said.

Of course, not all analysts believe the data will push Bank of Canada governor Mark Carney to veer off course. Douglas Porter, deputy chief economist at BMO Capital Markets, said the data surely raises the odds of a July rate rise but anything earlier than that remained remote. Analysts at TD Securities also shared a similar view.

Also, the data contained one key blemish – a 9.2% drop in machinery and equipment investment by Canadian companies, which does not bode well for efforts to boost abysmal productivity levels.

The GDP data attracted investors, as the Canadian dollar gained a full US1¢, to US96.01¢, on the possibility of an early rate hike.

Canadian growth should remain robust as the global recovery takes hold. Business surveys released Monday indicated manufacturers continue to lead the recovery, with factory activity expanding last month across Asia, the United States and Europe.
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