Tuesday, December 04, 2007

Interest Rates Fall! More good news for Vancouver's Property Market! Central bank cuts interest rates as high loonie, credit turmoil raise fears

Pressure on the Central Canadian manufacturing sector from the high loonie has prompted the Bank of Canada to reduce rates.

This great for Vancouver's real estate market.

We don't have Central Canada's problems with the high loonie stemming from being integrated with US manufacturing. BC's & Vancouver's economy are some of the strongest in Canadeqa. Lower interest rates make real estate more affordable by giving buyers more spending power.

Keep you fingers crossed for more good news from the Bank of Canada!

Globe and Mail Update

OTTAWA — The high Canadian dollar and turmoil in credit markets have prompted the Bank of Canada to cut its key interest rate by a quarter point.

Just months after the central bank indicated that it was on a course of hiking interest rates, it announced Tuesday it has changed direction, lowering its target rate to 4.25 per cent.

The move indicates that the central bank fears the Canadian economy is about to be sideswiped by a rapidly slowing U.S. economy and tighter credit conditions caused by financial market turmoil.

While Canada's economy is growing steadily right now, inflation is much softer than the central bank had projected earlier this fall. Total inflation was 2.4 per cent in October, and core inflation (which excludes the most volatile items) was 1.8 per cent, on a year-over-year basis.

Plus, the Canadian dollar unexpectedly spiked well above parity in early November, hurting exports and pushing down domestic prices, further taking the steam out of inflation, the bank said.

At the same time, financial markets around the world are struggling to come to terms with the U.S. sub-prime crisis, and have not been able to re-evaluate structured financial products, the central bank said in a statement.

Following the rate cut, the Canadian dollar fell more than a full cent, trading at 98.74 cents (U.S.) from Monday's close of 99.98 cents. Lower interest rates tend to diminish the allure of a country's currency,

The headwinds facing the Canadian economy have worsened since October and will likely drag on, pushing up bank funding costs, tightening credit conditions, and punishing the U.S. economy, the Bank of Canada noted.

“All of these factors considered, the bank judges that there has been a shift to the downside in the balance of risks around its October projection for inflation through 2009,” the bank's statement concludes. “In light of this shift, the bank has decided to lower the target for the overnight rate.”

A rate cut acts as an insurance policy, said Jacqui Douglas, economic strategist at TD Securities.

“While the Canadian economy is not yet showing any significant signs of strain, it's unlikely that it can keep growing at an above-potential rate for much longer, given the headwinds that it's encountering,” she wrote in a commentary.

It was no doubt a tough call for the central bank. Markets and economists have been divided on whether the central bank should stand pat or cut its key rate. The so-called shadow monetary policy council, run by the C.D. Howe Institute, recommended no cut, although the call was by no means unanimous.

“We think the Bank of Canada is at a difficult crossroads, and a mistake at this juncture could prove costly in the medium term,” foreign exchange analysts at the Bank of Nova Scotia said Tuesday.

Economists believe generally that if central banks wait too long to respond to a slowdown, they will be forced to make radical rate cuts to put the economy back on track.

Political pressure on the central bank to cut rates has been rising. The premiers of Ontario and Quebec have complained loudly that the high Canadian dollar is putting too much strain on their export-oriented economies.

Monday, organized labour and company executives in the manufacturing sector took the rare step of issuing a joint press release to urge the central bank to cut rates.

But at the same time, the Canadian economy is still in overdrive, the central bank says, and the job market is booming – posing risks for inflationary pressure.

In its statement, the Bank of Canada did not give many hints about whether it would continue to cut rates next year. Rather, it said it would take stock of the economy and financial market conditions again in January to make a new assessment.

Tuesday's announcement is the first time since April 2004 that the central bank has cut its key interest rate. After that time, the Bank of Canada gradually raised rates from a low point of 2 per cent, reaching all the way up to 4.50 per cent by July 2007. Rates have been on hold since July, until now.

With a file from Tavia Grant.

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