FedSpeak & Canadian Mortgage Rates

Ben-bernankeWith Canada so married to the U.S. economy, Canadian rate speculators are perpetually glued to U.S. Fed announcements.

Today we had a unique opportunity to watch U.S. Fed chief, Ben Bernanke, hold a scheduled press conference (Fed chairmen never do that). He said he wanted to “add transparency” to the Fed’s plans for future monetary policy.

Bernanke made several points of note for Canadian rate watchers. He said:

  • “Exceptionally low” U.S. interest rates will last for an “extended period.” The Fed has used that “extended period” phrase since March 2009.
  • U.S. inflation is picking up but “longer term inflation expectations have remained stable and measures of underlying inflation are still subdued.”
  • 2011 U.S. growth expectations have been cut to 3.1% (from 3.3%)
  • The U.S. labour market is in a “very, very deep hole”
  • Long-term U.S. unemployment is the “worst” it’s been since WWII
  • Rising oil prices are “bad for the recovery.”

All the Fedspeak of late continues to point to a slow and measured increase in U.S. rates, starting no earlier than late this year or early 2012.

A cautious Fed means the Bank of Canada will continue to be under less pressure to lift rates here. Mind you, analysts still expect the BoC to operate somewhat independently of the Fed thanks to Canada’s firmer economic footing.

The Fed aside, most economists are still predicting the next Canadian rate increase will fall on July 19…for what that’s worth.


Sidebar:  Bernanke said today that the reason he makes vague projections is because “we don’t know with certainty” how the economy will evolve.

That’s a good reminder of how imperfect economic forecasting is…because if the Fed doesn’t know, no one knows.


Rob McLister, CMT

  1. The Fed announced they will end QE2 in June but they are in no hurry to raise interest rates.
    The weak USD will continue to drive up the value of the CDN$ and the Euro where interest rates have already been jacked up.
    The potential problem for Canada is core inflation which is one of the main determinants of monetary policy. It spiked from .9% in February to 1.7% in March. If we head towards the 2% range in April, despite the fact that it’s well within the BoC’s target band, the BoC will have no choice but to raise rates even it means a higher CDN$.
    Once QE2 ends, it is expected that equities and commodities will start to cool off. With higher oil now having less of an impact on the CDN$, the BoC would actually have more maneuvering room to raise interest rates.
    Up until now, economists and analysts were unsure whether the BoC would be making a move on rates before the Federal Reserve. But with Bernanke reiterating that he’s not in a hurry to raise rates, this limits the BoC’s options to leave rates unchanged if inflation continues to rise.
    Once QE2 is phased out we’ll get a better idea of what would happen. I strongly believe we’re in for an increase come July or August but time will tell.

  2. once the election is done rates are going up for sure july 20th the BoC has been itching to do this, then we will have a further 0.75% increase by year end, we will be sitting at 1% increase for the year. That should goose some of the over extended mortgagors in variables.

  3. Low rates for an extended period. Joy. Look forward to $2 per liter gas and $5 per loaf bread. I wonder what that will do to house prices.
    The only subdued inflation is in wages and that is here to stay thanks to global labor arbitrage. Too bad curbing that isn’t part of Jack’s platform otherwise I’d vote for him too.

  4. The US economy has big problems with regard to its debt. One way to reduce your debt service ratio is to have inflation. The US central banks is printing money which indicates a high inflation rate in the future.

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