Tuesday, February 19, 2008

Interest Rates Set To Fall! Low Inflation Will Trigger BOC Rate Cuts - Good news For Vancouver Real Estate

Vancouver and BC's continuing strong economic performance is going to get a shot in the arm from the Bank of Canada. Central Canada's woes caused by US economic weakness and a high Canadian Dollar/weak US dollar has cut inflation in Canada. Inflation is what the Bank of Canada looks at when deciding on rate cuts. Look forward to a lot more good news for Vancouver Real Estate and for BC's economy in general.

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Inflation rate hits five-month low

Globe and Mail Update

Canada's inflation rate eased to a five-month low last month as the effect of a federal goods and services tax cut took effect and car prices cooled, clearing the way for deeper interest-rate cuts if needed.

The consumer price index rose at an annual 2.2-per-cent pace in January from 2.4 per cent a month earlier, Statistics Canada said Tuesday. Core prices, used by the Bank of Canada as a more stable indicator, rose 1.4 per cent, the slowest pace in two-and-a-half years.

The GST cut shaved about 0.6 per cent from consumer prices just as a strong dollar is keeping retailers such as car dealers in price-cutting mode. Inflation will likely slide below 2 per cent as stores keep passing on exchange-rate savings to consumers, predicted Stéfane Marion, economist at National Bank Financial.

The dampening effect of the currency leaves Canada “with roughly half the current U.S. inflation rate,” noted Bank of Montreal. Average inflation among OECD countries, meantime, is 3.3 per cent.

That leaves the door open for rate cuts when the central bank meets on March 4. The Bank of Canada's new governor, Mark Carney, signalled yesterday that borrowing costs will likely fall as the economy softens.

“The continuing softness in core CPI will give the Bank of Canada plenty of room to cut interest rates further, and adds support to our call for a 50-basis-point rate cut on March 4,” said Jacqui Douglas, economics strategist at TD Securities, in a note.

Upward pressure on inflation stemmed from rising gasoline prices and mortgage interest costs. Gasoline jumped 20.9 per cent between January of this year and last, a much hotter pace that the 14.9-per-cent gain observed in December and “the main factor in higher consumer prices,” Statscan said.

The gain was due to a sharp drop in prices in January of 2007 rather than any big change this year.

Owning a home got a bit pricier. Mortgage interest costs accelerated to 7.6 per cent while homeowners' replacement cost, or the cost of maintaining a home, increased 4.5 per cent.

Heating oil and other fuel prices jumped 24.7 per cent, though this was less than December's pace.

“This comparatively slower growth occurred despite colder temperatures that gave rise to higher demand, and despite below-average inventory levels in the north-eastern United States,” the report said.

On the flip side, buying or leasing a car was 4.9-per-cent cheaper than a year ago because of the GST cut and as manufacturer discounted new models. “This continuation of incentives came when the Canadian dollar was up relative to its U.S. counterpart,” the report noted.

Computer equipment and supply prices fell at the fastest pace in five months, sliding 16.7 per cent, led by declines in monitor and laptop prices.

Women's clothing was 4.5 per cent less expensive in January, the fastest decline in three years, because of post-Christmas sales and the GST cut.

Among provinces, inflation slowed or held steady across the board. It was particularly benign in British Columbia, where consumer prices were just 0.8 per cent higher than a year ago.

As for the GST, which was reduced the GST to 5 per cent from 6 per cent in January, the impact on prices varies. Some businesses likely boosted their margins at the same time, and others, such as car dealers, may have already cut prices in anticipation of the coming reduction, Statscan noted.

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