Market Commentary

posted Dec. 19, 2008

Bank of Canada lowers overnight rate target by 3/4 percentage point to 1 1/2 per cent

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.

Information note:
The Bank of Canada's next scheduled date for announcing the overnight rate target is 20 January 2009.

A full update of the Bank's outlook for the economy and inflation, including risks to the projection, will be published in the Monetary Policy Report Update on 22 January 2009.

Where are Variable Rates Headed?
In bad times,interest rates get better.This statement has held true this time around the economic circle,but the credit crisis added a new twist.Gone are the days of deep discounted variables,at least for now,but there is still a case for a variable even at a premium over prime.
This rate announcement brings the Bank of Canada rate down to 3.25%.Assuming the Bank's follow suit,those of you in discounted variables will be jumping for joy.This is the lowest Bank of Canada rate in history and there may be even more reductions ahead.
TD Bank economists were forecasting a reduction of .50% and then another.75% by January.Might have got it backwards but the headwinds and reading inside the lines on the above announcement would lead us to believe there is more to come. With reductions coming in long term rates,there is an opportunity to still park your mortgage in a variable.We have one lender who is currently offering a variable at a lower discount than most.
A variable with that lender,assuming they drop their rate in line with the Bank of Canada would be around 3.85%!
It is a sign that the variables may have room to drop their premium over prime,as liquidity improves.At the present time,lenders are trying to focus on fixed products where their direct costs are known,as variables cost them more money to maintain.

Where are Long Term Rates?
When interest rates last bottomed out in 2005,the five year bond rate hit 3.21% and the corresponding 5 year interest rate was 4.39%, a mere 1.17% above the bond rate.
The 5 year bond rate today is 2.21%!The credit crisis has created a liquidity problem for most lenders,resulting in higher costs for borrowing that money that they lend out in mortgages.
We have seen the 5 year rate at discounted rates peak at about 5.79-5.99% a few months ago and we are now seeing the 5 year rate drift lower as some liquidity slowly returns. Five year rates are approaching 5% again and we can see 5 year rates dropping even further.Even at discounted rates,there is still a huge premium over the bond rate,compared to historical standards.

posted Oct. 21, 2008

Bank of Canada lowers overnight rate target by 1/4 percentage point to 2 1/4 per cent

OTTAWA - The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of a percentage point to 2 1/4 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 2 1/2 per cent.
Three major interrelated developments are having a profound impact on the Canadian economy. First, the intensification of the global financial crisis has led to severe strains in financial markets. The associated need for the global banking sector to continue to reduce leverage will restrain growth for some time. Second, the global economy appears to be heading into a mild recession, led by a U.S. economy already in recession. Third, there have been sharp declines in many commodity prices. The outlook for growth and inflation in Canada is now more uncertain than usual.
Consistent with the G7 Plan of Action, major economies have announced extraordinary measures to stabilize their financial systems. These initiatives will be pivotal to resuming the flow of credit to support global economic growth. Canada's economy and strong financial system will benefit directly from these actions.
The weaker outlook for global demand will increase the drag on the Canadian economy coming from exports. Lower commodity prices will also dampen the outlook, working through a deterioration in Canada's terms of trade to moderate domestic demand growth. The marked tightening in Canadian credit conditions in recent weeks will restrain business and housing investment. The Bank expects growth to be sluggish through the first quarter of next year, then to pick up over the rest of 2009 and to accelerate to above-potential growth in 2010 supported by improving credit conditions, the lagged effects of monetary policy actions and stronger global growth. The recent sizeable depreciation of the Canadian dollar will also provide an important offset to the effects of weaker global demand and lower commodity prices. Overall, the Bank projects average annual growth in real GDP of 0.6 per cent in both 2008 and 2009, and 3.4 per cent in 2010.
With excess supply projected to build throughout 2009 and lower assumed energy prices, inflationary pressures will ease significantly relative to the projection in the July Monetary Policy Report Update. Core inflation is now projected to remain below 2 per cent until the end of 2010. Total CPI inflation should peak during the third quarter of 2008, fall below 1 per cent in the middle of 2009, and then return to the 2 per cent target by the end of 2010.
In the face of diminished inflationary pressures, the Bank of Canada lowered its policy interest rate by 50 basis points on 8 October, acting in concert with other major central banks. This extraordinary move, combined with today's announcement, brings the cumulative reduction in our target for the overnight rate to 75 basis points since the Bank's last fixed announcement date. These actions provide timely and significant support to the Canadian economy. The cumulative reduction in the Bank's policy rate since last December is now 225 basis points.
In line with the new outlook, some further monetary stimulus will likely be required to achieve the 2 per cent inflation target over the medium term. The evolution of the financial crisis, its impact on the global economy and the timing of the effects of the various extraordinary measures being taken to address it pose significant risks to the projection on both the upside and the downside.
The Bank will publish the details of its new projection for the economy and inflation, including all the key risks to the projection, in the Monetary Policy Report on 23 October 2008. Information note:
The Bank of Canada's next scheduled date for announcing the overnight rate target is 9 December 2008

What Does It All Mean?
The important wording in here is that the wind has been taken out of the inflationary balloon.You can see that where the Bank of Canada previously had been talking about inflation spurring growth over the Bank's target rate of 2%, they are talking about CPI(Consumer price Index) being below their target rate in 2008 and 2009 and returning to target rate in 2010.They are also hinting that more economic stimulus may be required-another drop in December?

We are now at 4%.It will be interesting to see if the Bank's drop the full .25%.In the last drop on October 8th,they tried to hang on to it and then dropped in the face of public pressure while saying that their cost of funds had dropped allowing them to drop their rates.Interestingly, CIBC still holds on to .10% and have their prime priced at 4.35%.There are also others out there who are holding onto .25% from the last drop.All raised their variable and line of credit style mortgages,the week before and replaced them with prime + models with discounts disappearing.All variables are now trading at a premium.More on that below.

Prime last bottomed out at 3.75% in 2002 and again in 2004.It looks like we may be heading toward matching that low.

What's Happening with the Canadian Dollar?
Here is a late breaking article on the markets reaction to the drop in the Bank of Canada rate and it's effect on the Canadian dollar.
"Loonie falls more than a cent
JOHN PARTRIDGE 09:40 EST Tuesday, Oct 21, 2008

The Canadian dollar fell more than a cent Tuesday morning after the Bank of Canada, as widely anticipated, cut its benchmark interest rate, although not as much as Bay Street had anticipated. The loonie was at 82.60 cents (U.S.) a few minutes after the bank announced at 9 a.m. (ET) that it has cut its benchmark rate to 2.25 per cent from 2.50. This was down 1.17 cents from Monday's official close. The consensus forecast among currency specialists and economist was that the central bank would chop the overnight lending rate by half a point to 2 per cent.
"Governor [Mark] Carney and crew once again threw a curve ball by deciding on only a quarter-point cut in its official rate to 2.25 per cent - just shy of matching the low set back in the third quarter of 2004 and first quarter of 2002," Scotia Capital financial adviser and former financial markets economist Andrew Pyle told clients in a note.
"There was an outside chance that Carney would opt for a more modest easing of only 25 basis points, on the basis that the Canadian dollar has already lost considerable ground (a decline of almost 15 per cent since late September) to below 83 US cents this morning."
Mr. Pyle also noted that the Bank of Canada's statement was "heavy on economic risks to Canada, with the Bank lowering its outlook for growth and inflation until mid-2009, where it expects things to re-accelerate." As well, he said the central bank left the door open to additional rate cuts towards the end of the statement, although this will depend on how Canada's economic data comes in and the state of battered global financial markets.
Punters have been betting for the past several days that Canada's central bank would cut rates, currency specialists said before the announcement.
However, BMO Nesbitt Burns senior economist Michael Gregory observed in a note to clients early Tuesday that there was an unusually wide range of expectations about what the Bank of Canada would do among economists surveyed by Bloomberg.
The latest poll, he said, showed four of 22 economists surveyed are betting the bank would leave rates untouched, eight (including BMO) were predicting a 25-basis-point cut and the other ten were looking for a 50-basis-point reduction. (A basis point is 1/100th of a percentage point.)
He argued the Bank of Canada would likely cut the rate because recent news on the U.S. credit crunch and the data on the U.S. retail and industrial sectors has been "downright dismal," likely pointing to a deepening recession south of the border that will drag Canada into one as well.
Mr. Gregory also said he bet on a 25-basis-point cut because of the larger 50-basis-point cut the bank made Oct. 8 as part of a concerted effort with other central banks to stabilize global markets and because of the "non-recession signals" the Canadian economy is "still emitting," such as the record September job creation numbers.
The bank also may be cautious, he said, because of the risk that the loonie's recent sharp deterioration increases the risk that core consumer price index inflation "could quickly move back above 2 per cent (from 1.7 per cent). This is obviously technical and most probably only temporary, but enough to elicit a hint of caution."

Where are Variable Rates
If you are in a discounted variable rate model, you are in the driver's seat.
With prime reducing your borrowing costs will be less and by all indications you can expect that situation to get better and remain stable for the rest of the year and perhaps throughput 2009.

If you are looking at a mortgage coming due for renewal,you will want to meet with us to discuss your options.

If you are looking at refinancing you will also want to meet to see how that may impact your current mortgage and what options you have.

Where are Long Term Rates?

The five year bond is still at 2.88 so there is not much of an argument that the Bank's can make for their cost of funds to be continually rising.The Bank of Canada also last week stepped into the market to help liquidity buy buying mortgages directly from the banks.This will have a positive effect in keeping the money supply rolling and bringing more confidence back into the credit markets.

For anyone looking at a new mortgage or a mortgage renewal,it would be wise to analyze the fixed rates offered against the new variable style mortgages.

Make sure your friends know there are better rates at The Mortgage Professionals. We still have a lender who is holding on to a 5.10% 5 year rate for their "no frills" style product and 5.25% for their standard prepayment product.

Last week we obtained a rate for a client that was 1.52% less than what her Bank had offered her.That amounted to a saving of $12,000 to her over 5 years!

As Bank's position themselves for profitability,the mortgage broker's role has become even more important to today's consumer.We have access to lenders with the lowest rates in the market place and it is our job to save you money.

posted Oct, 14, 2008

The following article gives you a great overview of what has happened and why and what is the potential impact in the near future. Following that is the announcement by the Bank of Canada of a drop of .50% in the key lending rate,which was a coordinated effort of central banks around the globe,including the Fed in the US. Following that is an overview of the impact on existing variable rate mortgages,new variable rate mortgages and new fixed rate mortgages.

If you have any concerns about the safety of Canadian lenders and the direction of the Canadian Housing market I have an excellent article that shows how we are so much better off in Canada and why.If you would like a copy of that article,please feel free to email me.

If you have any questions,please feel free to email me.If you know of anyone who is renewing their mortgage or refinancing,don't let them go to their Bank without having us take a look at their situation.Forward them a link to this page.We may be able to save them more on their mortgage and that could be thousands in their pocket.If we feel their Bank is treating them properly,we are going to tell them and it will cost them nothing.

regards
Brian Matthey
Broker/Owner
brian@mtgprof.com

This is an article from the Globe and mail yesterday that gives you a good view of what is happening in the mortgage and credit markets and why.

Should you lock in your mortgage?
The perpetual question for people renewing or taking out new mortgages is whether to lock into to a fixed-rate mortgage, or go with a variable-rate mortgage under which the rate floats along with the prime rate used by the banks for top borrowers. Today, the choice has never been more complicated as a result of a credit crunch that has caused lenders to ratchet up borrowing costs for both consumers and businesses.

Example: Lenders of all types have been offering fixed-rate mortgages at rates that are inflated well beyond what they'd be under normal circumstances, even after the usual discounts are applied. Meanwhile,discounts on variable-rate mortgages have all but disappeared at the dominant lenders, and at least one of the big banks, Toronto-Dominion Bank has added a rate premium of 1 percentage point to its variable-rate loan. Prime today is 4.75 per cent. Rather that follow the previous custom of offering a discount of 0.6 to 0.9 of a point or more off prime, TD is offering this kind of mortgage at prime plus a percentage point, or 5.75 percent.

Fully discounted five-year mortgages (that's what people usually choose if they go with a fixed rate) are running at about 5.45 per cent. That's not a bad rate by historical standards but here's the thing: With the economy weakening, it's widely thought that the Bank of Canada will start a declining rate trend that will push the prime rate lower. If that happens, borrowers with variable-rate mortgages will immediately benefit. Of course, people with variable-rate mortgages will be vulnerable when the economy rallies and interest rates start to move up again. But that could be a long time off. Bottom line, fixed-rate mortgages offer security in uncertain times at a fair prime. Variable-rate mortgages, if you can still get one at prime, offer a chance to wring some personal benefit out of an economicslowdown that causes interest rates to fall.

What was behind the Federal Reserve's Oct. 7 plan to buy up commercial paper?
The central bank is stepping in as a buyer of last resort in the $100-billion market for commercial paper. This is a form of short-term debt that thousands of companies use to finance their daily operations, including paying employees and buying supplies. The Fed hopes to kickstart this market and free up funds for corporations. The central bank said it was taking the action because money market mutual funds and other investors were loathe to buy commercial paper. Ian Stannard, a currency strategist at BNP Paribas in London, described the move as "probably the first piece of news we've had that starts to address the underlying problem in the financial system. This is a very proactive step and will be a huge help to getting things moving again.

What are the specifics of the plan?
Using Depression-era powers, the Fed will create a new temporary lending vehicle that eligible companies can tap for short-term cash (IOUs of less than three months). In return,the Fed will collect fees and interest,assuming the role of private investors, such as pension and money market funds, that have become too nervous to buy the paper.

How effective will the Fed's new measure be?
The historic move should unclog the market for these business IOUs, helping to insulate the real economy from the credit crunch. The hope is that, over time, private investors will feel confident enough to return to the market, allowing the Fed to withdraw. The catch is that the commercial paper market is just one piece of a massive and interconnected credit system that is no longer functioning, and the Fed can't possibly nationalize it all. Credit markets saw some slight easing Tuesday after the announcement, described by some observers as the most effective measure to date. Douglas Porter, deputychief economist at BMO Nesbitt Burns, said the central bank is putting itself even more into the "credit creation process" and taking on more risk as a result. Will it work? "This welcome step should alleviate some of the pressure on companies which were finding even day-to-day operations difficult to manage ... Still the problems besetting the credit markets are so multi-dimensional that no move will be a single fix," Mr. Porter said,noting the Fed wants to use every measure possible before cutting its benchmark Federal funds rate.

What's happening with commodities prices?
Commodity prices, including those for copper, corn and crude oil, are falling on the belief that a global economic slowdown or possibly a full blown recession will sap demand for resources. Much of Canada's economic strength during the past few years has been driven by skyrocketing demand for metals and other commodities, particularly from the emerging economies of China and India. While not all of the commodities are produced domestically, Canadian companies are active players in the resource sector, owning assets around the world. Another factor driving the sell off is the fact that speculative money from hedge funds had poured into the commodity sector and into the commodities themselves, which drove up prices. Now those same hedge funds are being forced to liquidate their positions, driving down the commodity prices and the value of resource sector shares.

Why are European banks having more trouble than those in Canada?
European banks are in trouble because their leverage - their assets to equity ratio - is typically much higher than those of their Canadian and U.S. counterparts. In North America, the average leverage ratio is about 20. In Europe, it's close to 40. At the end of June, the top dozen European banks had a leverage range from, at the low end, 18.8 (Royal Bank of Scotland) to, at the high end, 61.3 (Barclays). The European banks' sheersize makes them vulnerable too, in the sense that they may be too big to save. For example, the total assets of Deutsche Bank, Germany's biggest lender, are almost €2-trillion. That's more than 85 per cent of the country's GDP. Political squabbling also has the potential to hurt the European banks. If a big bank with operations scattered across the continent, like Italy's UniCredit or ING of the Netherlands, needs a bailout, who pays? The home country or all the countries where the bank has major subisidiaries?

Where will the $700-billion (U.S.) in the Wall Street bailout package go and how will prices be determined?
The money will be paid to Wall Street firms, banks, pension funds and other companies that hold bad mortgages and other toxic assets. The values aren't known at this point, and the amount paid will be decided in a reverse auction, in which the sellers of the assets compete with each other and decide how cheaply they will sell the toxic debts. The government, through the newly appointed Office of Financial Stability, then pays the lowest price offered.

Will the money ever be recovered?
The U.S. Treasury Department has said there is a good chance it will recoversome if not all of the money, although observers are not so certain. Previous rescue efforts have actually turned a profit, although others have cost billions. Who wins and who loses?
While it's theoretical at this point, financial institutions could win out by having their toxic assets bought by the government at what is effectively a premium. While banks can dispose of some of these assets now, they would be doing so at firesale prices if buyers are found. In an ideal world, the U.S. government would hold on to the troubled assets until maturity, when hopefully the real estate market will have recovered, and then dispose of them at at least breakeven. But it is a long-term process, and thus it is too early to tell how the taxpayer makes out.

Are there any safe places to invest right now?
The old cliché "cash is king" applies. Government Treasury Bills andshort-term bonds are safe, and so are guaranteed investment certificates and high-interest savings accounts offered by banks, trust companies and credit unions that are members of a deposit insurance scheme like the federally-backed Canada Deposit Insurance Corp. Money market funds are not loss-proof, but they are an option if you're looking for a place to park some money.

Are any parts of the stock market doing OK right now? Not really. It's more a matter of finding sectors that are less beaten upthan others. Consumer staples - think groceries and drugstores - is one.Telecom companies are another. Financials, believe it or not, have also hung in comparatively well in the recent market downturn after some big losses previously.

What should you do now?
Selling now means locking in potentially gut-wrenching losses that will ease when the market turns around. One common feature of bear markets for stocks: They all end and are replaced by bull markets. If you can stand thepotential for more losses in the near term, buying now will set up long-term gains in stocks.

What's happening in the credit markets?
The Bank of Canada continued its efforts to add some grease to the financialsystem , but there was no sign of any change for the better. In the United States, pressure has been building on the Federal Reserve to push through an emergency interest rate cut to bolster confidence. There has been talk that other countries would similarly cut rates.

What is interbank lending?
Banks normally lend each other cash and short-term securities to help balance out their everyday activities. But lately, banks around the world have been extraordinarily cautious about this lending - partly because they are worried about getting repaid - and this is driving up the interest they have to pay when they want to borrow. This also makes the banks much more cautious about lending out the money they receive in deposits, thus making it harder - and more expensive - for homeowners, small businesses or corporations to borrow. The standard interest rate for interbank loans is Libor, an acronym for the London Interbank Offered Rate. Libor is an average of interbank rates offered by more than a dozen banks, and is calculatedevery day. The difference between Libor and government bond yields has beengrowing recently, and that's important because corporate loans, mortgages and student loans are all based on Libor.

Don't banks usually get the money they loan from deposits?
That is usually the case, but the balance is never perfect, and that's why banks lend money to each other. Currently, there is a lot of demand for loans from corporations, which until recently haven't needed much money because they've been so profitable. With little cash available, rates have increased.

What is a liquidity injection?
Central banks can use their financial clout to try to get money flowing to the banks and their customers. In a liquidity injection, they make money available for banks to borrow, although the financial institutions have to post securities as collateral to get it. Last week the Bank of Canada said it would make $20-billion available to Canadian banks, and on Monday it said it would let banks pledge their troubled asset-backed commercial paper assets as collateral. This will give some banks more flexibility. One problem, said TD Bank chief economist Don Drummond, is that the central bank's injection is just for the short term - Bank of Canada loans usually have to be repaid within 90 days. But the demand from customers is trending towards longer-term loans - especially from corporations who can't get money any other way - so the central bank money won't help much on that score.

Where do the central banks get the money for a liquidity injection?
The Bank of Canada has billions of dollars in assets - about $56-billion at last count - mostly held in very safe securities such as bonds and treasury bills. In essence, when it makes money available to commercial banks, it is temporarily swapping its safe securities for the riskier ones the banks are putting up as collateral.

What is a credit default swap?
These were originally set up as a kind of insurance against bad debts. A holder would pay a series of "premiums," and in return would get a payout if a specified organization failed. It's the same idea as paying a lifeinsurance premium, where the beneficiary gets a payout only if the specified person dies. Like life insurance, everything is in balance unless there is an epidemic and people start dying left and right. With more companies going under, or threatening to do so, firms that issued swaps are themselves in trouble. That's what happened to insurer AIG, which sold credit default swaps that protected investors against bond defaults. When bonds started defaulting, AIG itself was left vulnerable.

Are bank deposits safe?
Bank deposits in this country - GICs or other deposits that mature in five years or less - are insured by the Canada Deposit Insurance Corp., a government agency. But the limit is $100,000 per person per institution. and not all financial institutions are members. Depending on the type of account in question, more than one account may be covered to $100,000 at a given bank. In Europe, some countries have recently removed any limits, to make sure that there is no rush of worried customers taking their money out and stuffing it under their mattresses. In Canada there has been no move to change the limit. The CDIC points out on its web site that banks in Canada don't fail often, but "it has happened and it could happen again." In fact, 43 CDIC members - mostly small ones - have collapsed since it was formed in 1967.

What is counterparty risk?
When you lend $20 to a friend, the counterparty risk is the chance that he or she won't pay you back. And it works the same way with corporations or financial institutions, although their measurement of risk is a little more sophisticated. If the counterparty risk is high, traders and banks won't lend money unless they get some solid collateral or loan guarantees, or they might just say "forget it."

What was Resolution Trust?
When hundreds of savings-and-loan institutions failed in the United States in the 1980s, a government-owned agency, the Resolution Trust Corp., was put in charge of liquidating the assets of the firms that were insolvent. It sold off the "good" assets (such as deposits and branches) to interested buyers, then disposed of "bad assets" (non-performing loans and foreclosed real estate) that the buyers of the "good" assets didn't want. This "Resolution Trust model" is what is planned for the current financial bailout, although there are some major differences. For one thing, it appears that the new agency will buy (and eventually try to sell) only the troubled assets - such as bad mortgages - of existing financial institutions, in a bid to keep those companies alive.

Bank of Canada keeps overnight rate target at 3 per cent

OTTAWA - 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. The three global developments highlighted in the July Monetary Policy Report Update continue to have a major influence on the Canadian economy. Two of them - the course of the U.S. economy and the ongoing turbulence in global financial markets - have evolved broadly in line with the Bank's expectations. However, there is an increased risk of a more pronounced interplay between weakness in the U.S. economy and tightness in credit conditions that could affect the U.S. outlook for 2009. With respect to the third highlighted development, the sharp increases in commodity prices, the risk identified in July that these prices could be weaker than assumed has materialized. This has been largely due to the impact of slower global growth on the demand for energy. Given tight inventories, commodity prices can be expected to remain volatile. The reduction in commodity prices has been a significant factor in the decline of the Canadian dollar against the U.S. dollar. The weaker global growth and the decline of the Canadian dollar will have opposing effects on the demand for Canadian goods and services. In Canada, domestic demand has slowed modestly but remains strong. It continues to be supported by financial conditions that remain significantly better than those in most other major economies and by income gains stemming from past improvements in the terms of trade. Overall, the level of economic activity is slightly lower than expected in July but still close to the economy's production capacity. Global inflationary pressures remain elevated, with potential implications for import prices and the dynamics of inflation in Canada. While total CPI inflation has moved above 3 per cent, core inflation has stayed at 1.5 per cent as expected. The temporary factors affecting both of these measures should dissipate over the coming quarters, and the Bank continues to expect that total and core inflation will converge on 2 per cent in the second half of 2009. However, the recent decline in both spot and futures prices for energy means that the spike in total CPI inflation expected between now and the first quarter of 2009 will be lower than projected in July. Given these developments, the Bank judges that the current level of the target for the overnight rate remains appropriately accommodative. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term. Information note: The Bank of Canada's next scheduled date for announcing the overnight rate target is 21 October 2008. A full update of the Bank's outlook for growth and inflation, including risks to the projection, will be set out in the Monetary Policy Report, to be published on 23 October 2008

Where are Variable Rates Headed?
Notably comments:

• "Core inflation below 1.5%.Total and Core inflation expected to stay within 2% by the second half of 2009."
• The Bank's target inflation is 2%.Given the above we should see prime stay where it is for the rest of 2008 and through the first half of 2009.
• Prime is still 4.75%
• Best variable rates run around Prime less .60% on a fixed discount and there are still some up front discount models available.

Where are Long Term Rates?
The 5 year bond is below 3%.Risk spreads continue to influence long term rates in the wake of the on going credit crisis.

Best 5 year rate is at 5.14 for a no frill style mortgage.other rates from 5.25% up.Still not a bad rate but we should be at 4.25% if risk spreads were not at play.

100% Financing Still Available Under the Current Guidelines
The changes brought about in reducing amortizations and eliminating best rate 100% financing will definitely have an impact on the first time buyers market!Get those applications in now as we still have lenders offering 100% at "A" rates ,but the window is slowly closing!!

October the 15th is the deadline!!

Bank of Canada releases Monetary Policy Report Update

OTTAWA - The Bank of Canada today released its July Monetary Policy Report Update. In it, the Bank described three major developments affecting the Canadian economy: protracted weakness in the U.S. economy, ongoing turbulence in global financial markets, and sharp increases in the prices of certain commodities, particularly energy. While the first two developments are evolving roughly in line with expectations outlined in the April Monetary Policy Report, many commodity prices continue to outpace earlier expectations, which has altered the outlook for global and domestic inflation.

The Update noted that although economic growth in Canada in the first quarter of 2008 was weaker than expected, final domestic demand - supported by strong terms of trade - continued to expand at a solid pace. The Canadian economy is judged to have moved into slight excess supply in the second quarter of 2008. Excess supply is expected to increase through 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 economic growth starting early next year, bringing the economy back to full capacity around mid-2010.

Assuming energy prices follow current futures prices, 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 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.

The three major developments affecting the Canadian economy pose significant upside and downside risks to the projection. On the upside, domestic demand could be greater than projected, potential output growth could be lower than assumed, and global inflationary pressures could lead to higher-than-projected import costs for Canada. On the downside, commodity prices could be weaker than assumed, U.S. growth could be weaker than expected, and continued strains in global financial markets could have a greater-than-projected impact on global growth and the cost and availability of credit in Canada. Weighing the implications of these considerations, the Bank views the risks to its projection for inflation as balanced. Against this backdrop, the Bank judges that the current level of the target for the overnight rate - 3 per cent - 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 2 per cent inflation target over the medium term

Where are Variable Rates Headed?

Sounds to me like we are likely to see prime remain where it is through the rest of 2008 into early 2009 and maybe further.

Bank of Canada Announcement July 15th keeps rate the same!
Bank of Canada keeps overnight rate target at 3 per cent

OTTAWA- 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.

Where are Variable Rates Headed?

BANK OF CANADA STAYS THE COURSE!
Bank of Canada keeps overnight rate target at 3 per cent

Bank of Canada lowers overnight rate target by 1/2 percentage point to 3 per cent

OTTAWA- 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.

Since the April Monetary Policy Report (MPR), economic developments have been broadly in line with expectations. However, the balance of risks to the Bank's April projection for inflation in Canada has shifted slightly to the upside. Although the composition of U.S. growth has not been favourable for demand for Canadian goods and services, overall, global growth has been stronger and commodity prices have been sharply higher than expected. At the same time, many of the downside risks to inflation identified in the April MPR have eased, while the evolution of credit conditions has been in line with expectations. The risk remains that potential growth will be weaker than assumed.

With the decline in first-quarter GDP, the Canadian economy is judged to have moved into excess supply, which is expected to increase this year. Consistent with the April MPR, the Bank continues to project that economic growth will pick up this year and accelerate in 2009, owing in part to a firming of U.S. demand and accommodative monetary policy in Canada.

If current levels of energy prices persist, total CPI inflation will rise above 3 per cent later this year. However, with the Canadian economy operating in excess supply, core inflation is expected to remain below 2 per cent through 2009. Both total and core inflation should converge on 2 per cent in 2010 as the economy returns to balance.

Against this backdrop, the Bank now judges that the current stance of monetary policy is appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 per cent inflation target. There continue to be important downside and upside risks to inflation in Canada, which the Bank will monitor closely. Information note:
The Bank of Canada's next scheduled date for announcing the overnight rate target is 15 July 2008. The Bank will publish an updated projection for the economy and inflation, and its assessment of the risks, in the Monetary Policy Report Update on 17 July 2008.

Where Are Variable Rates Headed?
With the Bank of Canada's announcement today,it is evident that they think there is no current need to drop their rate any further to stimulate the economy.There are inflation risks apparent due to energy prices but these are balanced by a decrease in GDP in the first quarter.They feel right now that their monetary policy is in line to keep inflation around their target level of 2%. This being the case,it is good news for variable rate models as this announcement points to some stability throughout the rest of the year and perhaps into 2009.There is even a hint that the Bank of Canada expects core inflation to remain below 2% throughout 2009.This would mean even more rate stability in prime in the absence of inflation. Variable rate models then still are the "flavor of the month" and may well be the flavor for the rest of the year into 2009.

BANK OF CANADA MAKES A BOLD MOVE Rate drop of .50%

Bank of Canada lowers overnight rate target by 1/2 percentage point to 3 per cent

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

Growth in the global economy has weakened, reflecting the effects of a sharp slowdown in the U.S. economy and ongoing dislocations in global financial markets. Growth in the Canadian economy has also moderated as buoyant growth in domestic demand, supported by high employment levels and improved terms of trade, has been substantially offset by the fall in net exports. While both total and core CPI inflation were running at about 1.5 per cent at the end of the first quarter, the underlying trend of inflation is judged to be about 2 per cent, consistent with an economy that was operating just above its production capacity.

The Bank is now projecting a deeper and more protracted slowdown in the U.S. economy. This has direct consequences for the Canadian economic outlook, with declining exports projected to exert a significant drag on growth in 2008. In addition, tightening credit conditions and softening sentiment are expected to moderate business investment and consumer spending. Nevertheless, domestic demand is projected to remain strong, supported by firm commodity prices, high employment levels, and the effect of cumulative easing in monetary policy.

The Bank projects that the Canadian economy will grow by 1.4 per cent this year, 2.4 per cent in 2009, and 3.3 per cent in 2010. Consistent with this growth profile, the economy moves into excess supply in the second quarter of 2008, and spare capacity continues to increase through early next year. However, a gradual recovery in the U.S. economy, a return to more normal credit conditions, and accommodative monetary policy should generate above-potential growth and bring the economy back into balance around mid-2010.

The recent price-level adjustments for automobiles and the effect of past changes in indirect taxes will keep measured inflation below target through 2008. The emergence of excess supply in the economy should keep downward pressure on inflation through 2009. Both core and total inflation are projected to move up to 2 per cent in 2010, as the economy moves back into balance. There are both upside and downside risks to the Bank's new projection for inflation; these risks appear to be balanced.

In line with this outlook, some further monetary stimulus will likely be required to achieve the inflation target over the medium term. Given the cumulative reduction in the target for the overnight rate of 150 basis points since December, the timing of any further monetary stimulus will depend on the evolution of the global economy and domestic demand, and their impact on inflation in Canada.

A full analysis of economic and financial developments, trends, and risks will be set out in the Bank's Monetary Policy Report, to be published on 24 April 2008.

Information note: The Bank's next scheduled date for announcing the overnight rate target is 10 June 2008.

Bank of Canada Reacts to a Slowing Economy
Rate drop of .50%

Bank of Canada lowers overnight rate target by 1/2 percentage point to 3 per cent

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

Information received since the January Monetary Policy Report Update (MPRU) indicates that economic growth in Canada through the four quarters of 2007 was broadly in line with expectations. Domestic demand has remained buoyant, as rising commodity prices and high employment have continued to support income growth. Canada's net exports weakened further in the fourth quarter, reflecting the slowing U.S. economy and the impact of the past appreciation of the Canadian dollar. Overall, the Canadian economy remained above its production capacity at year-end. Core and total CPI inflation - at 1.4 per cent and 2.2 per cent, respectively, in January - have also been consistent with the Bank's expectations.

At the same time, there are clear signs that the U.S. economy is likely to experience a deeper and more prolonged slowdown than had been projected in January. This stems from further weakening in the residential housing market, which is adversely affecting other sectors of the U.S. economy and contributing to further tightening in credit conditions. The deterioration in economic and financial conditions in the United States can be expected to have significant spillover effects on the global economy. These developments suggest that important downside risks to Canada's economic outlook that were identified in the MPRU are materializing and, in some respects, intensifying.

The Bank now judges that the balance of risks around its January projection for inflation has clearly shifted to the downside, and, as a result, the Bank is lowering the target for the overnight rate. Further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to achieve the 2 per cent inflation target over the medium term.

The Bank will publish a new projection for the economy and inflation, including risks to the projection, in the Monetary Policy Report on 24 April 2008.

This move by the Bank of Canada keeps variable rate mortgages in vogue.Deep discounted up front variable rate mortgages provide the best opportunity for a client to take advantage of further moves by the Bank of Canada,while waiting for long term rates to reduce.Clients should consider a discount period of 6-9 months which will give them significant up front savings and more potential savings down the road if long term rates drop and they choose to lock in later on.Even if long term rates stay where they are,clients will have the benefit of the discount period before opting to lock in.Some clients may choose to stay variable beyond their initial discount period if prime continues to fall and there is no indication of long term rates increasing. With prime now reduced to 5.25%,a six month discounted variable would be 2.90% versus a 5 year fixed at 5.74%!

What Happened in 2007!

2007 started off on the heels of an inflationary economy with the prospect of prime increasing into the year.Long term rates on 5 year mortgages were sitting at 4.99% and the 5 year bond rate was 3.94%.The spread over bond was below it's historic average spread of 1.20% Prime increased to 6.00% and then 6.25% in July and then back again to 6.00% in December.Best discounted five year mortgage rates moved up from 4.99% to 5.79 in June and by the end of the year were slightly over 6%. Throughout 2007 constant inflationary pressure was evident in the Bank of Canada's announcements but the Canadian dollar went on a fantastic run that kept prime from moving significantly higher as the Bank of Canada was concerned about the affect on Canada's manufacturing and export sector by the higher dollar.

In the fall the first hint of the effects of a sub prime crisis surfaced in the US with housing sales and house values retreating along with a high level of mortgage defaults.The rules of the mortgage game started to change. In the US for the past 5 or more years,there were a number of products that gave buyers a substantial up front interest discount for a period of up to three years.Homeowners were paying an artificially low mortgage payment on their mortgages and based on the increased value of their property many had added more debt via lines of credit or second mortgages.When the initial discount period ended,many homebuyers found themselves unable to handle the higher payments.Some were able to refinance.Many were not as the value of their home had gone down so there was not enough equity to pay out all their debt.These were normal qualified homebuyers and home owners with good credit

Then there was the sub prime market.Borrowers who didn't qualify for mortgages at prime rates and they faced the same dilemma.On top of all this there was the impact of a pending recession,an over supply of unsold housing and wide spread job losses.

Now mortgages and other credit instruments such as credit cards and loans are sold as prepackaged sophisticated debt instruments to investors in a pool.These pools are made up of millions of dollars and are sold to institutional investors who seek a higher rate of return than they can get on bonds or other more secure investments.These instruments in the US were the darlings of the investment world and were bought up in large numbers by banks around the world.When the mortgages,loans and credit cards in these pools start to go into default the value of these pools come into question and buyers stop buying.Not only do they stop buying but any investments they hold start to lose their value.When investors stop buying the money supply available for mortgages starts to dry up.When sub prime mortgages go into default,then the value of prime mortgages also gets called into question.Overnight,funding sources for sub prime lenders dried up and many sub prime lenders simply closed their doors.Others tightened up their lending criteria.Prime lenders found their cost of borrowing for short term money and long term money suddenly went up as investors demanded higher returns for their risk.All this happened in the US but Canada was not immune to the overflow effect.More on that in the next section on where are rates going in 2008.

Where are variable rates going in 2008!-
The first spill over effect of the credit crisis was the loss of the deep discounts on variable rate mortgages.Where discounts from prime were common in the range of .75% to 1.00% off prime for a 5 year term these have been trimmed to .50% and less.The bank's cost of funds for short term mortgages has increased substantially so we don't any near term correction in sight .That being said with a current prime rate of 6.00%,the variable still is a viable alternative to a fixed rate mortgage given what maybe down the road in 2008.

The Bank of Canada has indicated that there is sufficient evidence of a recession in the US impacting Canada's economic growth and they are ready to lower rates ,if Canada's economic growth is affected.

Most market economist's see a drop in rates in 2008 somewhere between a .50% to 1.00% by year end 2008 but another factor has been added to the mix .There was an interesting article in the Globe and Mail this morning that stated that the banks were considering not dropping rates in lock step with the Bank of Canada.This would destabilize Canada's monetary policy and it is a step that would not be viewed kindly.The banks argument is the cost of borrowing has risen on international markets but this cost has in fact dropped since December.The bank's prime rate is already 1.75% above the Bank of Canada's prime rate.There is some speculation that if the bank's did so consumer and business backlash would force them off the fence and if that didn't do it,the Bank of Canada would do some arm twisting.The Bank of Canada in fact did drop their rate a .25% on the 22nd and despite the threat by the banks,they did move down.

Where are fixed rates going in 2008?-
If it weren't for the credit crisis,our current 5 year mortgage rate would be about 4.75%.The current bond rate is 3.49 and the current 5 year best discounted mortgage rate is 5.99%.That's a spread of 2.50% which is 1.30% higher than the historical spread.

Why?
Again everything can be related back to the sub prime crisis and the carryover effect to anything associated with mortgages.Fact is in Canada we have not been lending as they have in the US as we are much more conservative in our lending practices.Many of the prime rate mortgages in Canada are insured by CMHC/Genworth and sold in pools the same way as our US counterparts ,but we have not experienced anything of the delinquency or turmoil of our neighbours south of the border.That being said we are being painted with the same brush."If it happened in the US it could happen here " is the investor sentiment that has driven yields up. There is another factor at play here though.Many banks have experienced serious losses due to their exposure to the sub prime securities.The biggest loser in Canada has been CIBC who is arranging a private share placement of $2.5 billion dollars to shore up their balance sheet.Others have reported losses as well in the hundreds of millions of dollars but there is a feeling that the full extent of those losses have not yet been revealed.Bond rates have been falling and yet there has been a minimal adjustment in rates on long term mortgages.I think the banks's have found an excuse to pad their profit margins using the credit crisis as excuse to do so to try to make back some of the bottom line lost in the credit crisis.Certainly the speculation that the banks would hold their prime rate at a time when the Bank of Canada would lower theirs speaks to the the same profit motive. Economist's believe we will see long term rates drop by about .50% this year.I think we will only see this happen once the true extent of the sub prime crisis has washed itself through the market and when competition among the banks returns.One of the advantages that we have as a broker is that we do not rely on the major institutions for the bulk of our mortgage business.We have many smaller institutional lenders who are interested in increasing their share of the mortgage market.As a result,these lenders are more quick to react to provide us with more competitive rates than the major banks are willing to provide. Given that long term rates are around 6.00% and that discounted prime rate models are around 5.50%,the variable rate mortgage provides a viable alternative to consumers .Financing with a variable will provide you with an immediate saving of .50% over long term and there is nothing on the horizon to suggest that long term rates are going to increase.If prime drops in 2008,there is a further saving.When competition returns to the long term rate market,rates may drop and that would be the time to consider locking in.Right now,banks with little or no exposure to the sub prime crisis are reaping a financial bonus in the extra spread sitting in fixed rate mortgages.

Late Breaking News-Bank of Canada Weighs in Jan 22,2008 Bank of Canada Reduces it 's rate by .25%
Here is a overview of the Bank's announcement from The Globe and Mail

OTTAWA - The Bank of Canada has cut its key interest rate by a quarter of a percentage point, and is indicating there are further cuts to come, in order to help Canada deal with a brutal U.S. slowdown. The central bank said it is lowering its target rate to 4 per cent - the second month in a row for looser monetary policy - and said it was slashing its growth forecasts for the United States and Canada, for this year. Inflation in Canada is also proving to be less of a threat than the Bank of Canada expected in its last forecast in October, the bank said, suggesting that prices will remain suppressed until the end of 2009. Still, the central bank resisted calls for a steeper rate cut of half a percentage point, saying the Canadian economy continues to operate in overdrive for now, despite the clouds on the horizon. The U.S. Federal Reserve announced its surprise massive interest rate cut of three-quarters of a percentage point about an hour before the Bank of Canada officially issued its own announcement on Tuesday morning. By that time, however, the Canadian central bank had already handed over its statement to journalists in a lock-up - essentially leaving the Bank of Canada with little choice but to stick with its plan to cut by a quarter of a percentage point, regardless of the Fed's move. (A Canadian official said the Fed did not give the Canadian central bank any advance notice of its surprise cut.) "Financial market conditions have deteriorated since October, leading to a tightening of credit conditions in industrial countries," the Bank of Canada said in a one-page statement accompanying its rate announcement. "Given this, and a deeper, more prolonged decline in the U.S. residential housing sector, the 2008 outlook for the U.S. economy is now significantly weaker than at the time of the October [forecast]." Canada's economy will be hit hard, the central bank said, especially in the export sector. But because commodity prices have risen in the past few months, Canadian businesses and consumers have seen their incomes grow, and domestic demand is expected to hold up relatively well. All told, Canada's economy will slow this year, and begin gradually recovering in 2009, the bank said. But in order to get there, more rate cuts will likely be necessary. "In line with this outlook, the bank has decided to lower the target for the overnight rate and further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to return inflation to target over the medium term," the bank concluded. The Bank of Canada will publish full details of its projections and analysis on Thursday. It did not say on Tuesday by how much it would slash its growth forecasts for the United States and Canada, and merely indicated that the changes would be significant. In October, the central bank projected that the Canadian economy would expand by 2.3 per cent in 2008, and 2.5 per cent in 2009. Now, the bank believes 2008 will be weaker than that, but 2009 will be stronger. Private-sector forecasters expect, on average, that the Canadian economy will grow by about 2.1 per cent, but they are in the midst of revising that number down, given the rapid deterioration in the United States. The central bank's last official projection for inflation in Canada was that it would fall below its 2 per cent target this year but return to target by the second half of 2008. On Tuesday, however, the Bank of Canada extended this timeline by an entire year, saying inflation would not return to target until the end of 2009 - suggesting it sees weakness in the North American economy for some time to come. As for the United States, the Bank of Canada's old growth expectations in October were for 2.1 per cent in 2008 and 3.0 per cent in 2009. Many private-sector analysts say the United States is skating close to a recession, while some believe the recession is already here. With the Fed's 75-basis-point cut on Tuesday morning, there is now an appreciable gap between the American's key interest rate of 3.5 per cent and the Canadian key interest rate of 4.0 per cent. Talk of such gaps in the past has led to significant strengthening of the Canadian dollar - something Canadian exporters would no doubt have serious trouble dealing with right now.

Land Transfer tax rebate for first time buyers of resale homes
Do you know of a first time buyer who is about to purchase a resale home?The land transfer tax rebate was previously only applicable to new homes and has now been expanded to include resale homes.Any purchase agreement after December 13,2007 qualifies.

If you know of anyone that would like more information I will send them a complete information package on how they qualify and how they obtain their refund.Have them send me an email under the heading "Info-Land Transfer Tax Refund"

New 100% Financing program for rental property
The recent announcement by CMHC to allow 100% financing for buyers of rental properties will be a boon to those who do not have the necessary equity to get into this market but who have good credit and good income.

If you are interested in buying investment property,email me under the heading"rental property" and I will send you a feature sheet which outlines all the particulars of the program