Bank of Canada Holds Firm and Steadies the Economic Recovery
By Brian Madigan LL.B.
It’s a balancing act, no matter how you look at it. On Tuesday October 20, 2009, the Bank of Canada held inteerst rates firm at 0.25%.
• The high Canadian dollar has a negative impact on the economy and it will slow Canada’s recovery from recession
• The current strength in the dollar is expected, over time, to more than fully offset the favourable developments since July
• The central bank intends to keep the influential rate at that unusually low level (0.25%) until mid-2010 to help business conditions return to health
• Heightened economic volatility and “persistent strength in the Canadian dollar” are working to slow growth
• The economy will return to full potential output in the third quarter of 2011
• Inflation is not expected to hit the preferred 2% target until the third quarter of 2011, one quarter later than expected
• Growth is expected to be “slightly higher” in the second half of this year than previously projected — 2.15% according to its last economic outlook published in July — but to average “slightly lower” over the balance of its projection period, which goes until the end of 2011
So, that seems clear enough. The central bank wants to control the value of the loonie compared to the US dollar. That will aid the economic recovery. Inflation is secondary. Any effect of higher prices in the housing industry will be with later.
For now, the low interest rate tool is being used. Later, rates can increase to control inflation.
So, what does this mean for the housing sector?
• Increased prices to start
• Followed by increased supply to meet the demand
• This will slow the increase in prices
• Higher rates will dampen the real estate market and depress prices somewhat
• The sellers’ market will stabilize, to a balanced market and then return to a buyers’ market
And, that’s just the way the cycle goes. Trying to pick the exact months are very difficult. If you are planning to buy, buy now! If you are planning to sell, then sell into a rising market. Don’t be the last one standing in a game of musical chairs.
Don’t forget that the central bank is not all that happy about inflation. If the chartered banks raised their own rates to their customers, the Bank of Canada really wouldn’t be inclined to chastise them. With better spreads, bank stock presents an excellent opportunity. By the way, did you miss a great investment over the last twelve months… banks… any one of them… and you would have doubled your money.
Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com
