Entries from May 2005 ↓

As expected, the Bank of Canada chose to leave short-term interest rates unchanged today (May 25th), which is good news for people with lines of credit, business loans or variable-rate mortgages. It’s the fifth time in a row that the central bank has decided to hold the line on the cost of money.

The decision was just what most economists expected, and it means the prime rate at the chartered banks will stay hovering just about the 4% mark. But this is in stark contrast with the United States, where rates have been steadily marching higher, with the next hike expected to be June 30th.

Why are rates here stable for now? Sadly, because the economy has been slowing down, with growth forecast to be a tepid 2.5% in 2005. One of the contributing factors has been market disappointment with the federal Liberal government, which is assaulted daily by new allegations of corruption, which was barely able to survive last week’s non-confidence vote, and is on the verge of passing a budget containing huge amounts of new federal spending on social programs while abandoning a much-needed corporate tax cut.

That budget, in fact, is expected to have an impact on Canada’s interest rates as early as July 12th, when the central bank will next review its key overnight rate. The betting is a quarter point increase could result, pushing the prime to 4.5% and immediately raising the cost of short-term borrowings, including variable rate mortgages.

The Bank of Canada set the stage today, saying “a reduction in monetary stimulus will be required over time.” That’s bank-talk for “get set, because we will be hiking rates.” The real story will be how much Ottawa’s proposed orgy of new spending will stimulate inflation, leading to even higher rates in a bid by the central bank to keep it under control. Meanwhile, with economic growth tenuous, higher rates will only serve to make things worse by cooling consumer spending and business investment.

If this federal government truly wanted to help Canadians, it would curtail spending, continue to run a budget surplus, and ensure consumers, homeowners and small business operators will not soon be faced with the added burden of rising interest costs.

From today’s Toronto Star business section. Hold on to your mortgage, folks. The Liberal budget legacy could be explosive.

Budget raises rate fears

STEVEN THEOBALD
BUSINESS REPORTER

The federal budget packs so much fiscal spending oomph for the economy that the central bank may be forced to start hiking interest rates sooner and higher to prevent inflation pressures, some economists are warning.
“This budget will have created the perverse effect of generating higher interest rates,” warns Marc Lévesque, chief strategist at TD Securities.
The Bank of Canada, which next sets interest rate policy tomorrow morning, must now consider a government spending package that will add about 0.4 per cent of gross domestic product this year and 0.5 per cent in 2006, Lévesque said. “It’s a significant fiscal kick — the largest we’ve had in a long time — and there are consequences to that,” he said.
“If the economy wasn’t operating so close to capacity it wouldn’t matter because the bank could just sit back and let growth rip.”
He still expects the central bank will wait until the fall to start raising its trend-setting overnight rate, but the increase may now come in September rather than October.
By the end of 2006, the overnight rate could be an extra half point higher than previously expected — 4.5 per cent versus 4 per cent — because of the added government spending, Lévesque said.
The Bank of Canada has held its overnight lending rate at 2.5 per cent, citing concerns the strong Canadian dollar is hampering the export sector.
Short-term commercial loan rates, such as the prime lending rate and variable-rate mortgages, tend to be more in lockstep with the overnight rate. Longer-term interest rates are set by bond markets, which are indirectly influenced by the overnight rate.
All 12 banks and brokerages surveyed by Dow Jones on Friday expect the central bank will again leave rates unchanged tomorrow. Looking ahead, the spendthrift budget all but locks in a quarter-point rate hike on the following policy setting day, July 12, predicted Michael Gregory, a senior economist with BMO Nesbitt Burns.
He expects tomorrow’s policy statement from the central bank will set the stage for a July move by taking a more hawkish tone.
“With the two budget bills passing, the Canadian economy is going to soon start feeling the benefit of the additional fiscal spending.”
With the unemployment rate near a 30-year low and capacity utilization rates at a 16-year high, the economy doesn’t have a lot of room to absorb all that extra government spending without creating inflation pressures, Gregory added.
“So we believe the bank, given what they do, will be raising interest rates sooner rather than later.”
CIBC World Markets represents the pessimists’ camp. It believes the central bank will not be raising interest rates any time soon, and certainly not this year.
A big-dollar federal budget isn’t changing that point of view, said Avery Shenfeld, CIBC senior economist.
“Fiscal policy and monetary policy are both providing stimulus, but all the evidence shows the Canadian economy needs every ounce of it.”
Conversely, analysts at National Bank Financial argue the added fiscal stimulus together with a softening dollar and upbeat U.S. economic data could prompt the central bank to raise its growth forecast.
“Given the Bank of Canada’s assumption about the current level of the output gap — virtually non-existent — and its concern about the lack of productivity growth in Canada, it wouldn’t take much of an upgrade to prod the bank into action at its July meeting,” NBF assistant chief economist Stéfane Marion wrote in an email to clients.
Andrew Pyle, senior financial markets economist at the Bank of Nova Scotia, takes a much more skeptical outlook.
The economic situation is precarious because of a slowing world economy and falling commodity prices, he says. With inflation not posing a threat, the central bank ought to stay on the sidelines for the foreseeable future, he suggests.
“Not only is there no room for near-term interest rate hikes, but the argument in favour of eventual tightening is also losing its validity.”

I noticed that Halton Liberal MP Gary Carr issued a media release today. How’s this for spinning?:

It was an exciting week in Ottawa. Despite attempts by the Conservative / Bloc-separatists alliance to defeat the budget and force Canadians into an early election, Parliament passed the popular Liberal budget, allowing us to continue implementing the programs on which we were elected to deliver a year ago.
It was a close vote, but those who believed in this budget stood together and voted yes to a stronger Canada. Those that believe in a strong Canada voted:
· Yes to a balanced budget and a stronger economy
· Yes to improving health care funding
· Yes to affordable child care and an early learning program
· Yes to protecting the environment
The Conservative / Bloc-separatist alliance vote against the budget represented a vote against all of these important and popular initiatives.

It’s one thing to be partisan about what your government does, but quite another to be intellectually dishonest with your constituents. Time for a reality check, my friend (or in your case, a Reality Cheque!).

The budget has become as corrupted as the Liberal government itself. In order for the Martinites to push it through, they were forced to do a deal with the Jack Layton New Democrats. In return for socialist support, the Liberals were told to defer more than $4 billion in desperately-needed tax cuts for Canadian business, and to add almost $5 billion in new spending on social programs.

This is not a “popular” budget – except with New Democrats – and it is not the budget that Finance Minister Ralph Goodale stood in the Commons and delivered. He knows better. It does not represent fulfilling Liberal election promises, but is rather merely about staying in power – and doing so by promising money right, left and center. Suddenly there are billions for Atlantic Canada, billions more for Ontario and billions for all provinces signing onto an ill-conceived child care program. This is vote buying at its worst, and nothing to crow about in a media release.

As for the “close vote,” all Canadians know the outcome was 152 to 152, and that the House of Commons is bitterly and evenly divided as never before in the history of politics. It was only broken in the government’s favour by the Liberal-appointed Speaker. Hardly worth the wild party that Liberals threw in an Ottawa bar later that night.

And then there is constant Liberal spin that their government is being threatened by “the Conservative/Bloc-separatist alliance.” It is interesting to remember that the Liberal Party opposed all the efforts to find an accommodation with moderates in Quebec to thwart the separatist forces there. We should all remember that it was on Jean Chretien’s watch that Quebeckers almost voted to leave Confederation. And we will never forget that the Liberal response was to try and buy off the province with a sponsorship program that was as wrong and insulting as it was criminal. The reason we have Bloc Quebecois separatists sitting in Parliament today, and will likely not see any federalist MPs from Quebec after the next election, is 100% the fault of Liberal governments, past and present.

Finally, this Liberal MP’s assertion the budget will lead to “a balanced budget and stronger economy” is the wildest spin of all. In the last month, the Liberal government has promised more than $20 billion in new spending, and it is now impossible for a deficit to be avoided. In other words, all the sacrifices that Canadians went through with spending cuts and implementation of the GST to achieve the budget surpluses of the past decade, are being squandered. Worse, today we have more news from senior TD Canada Trust economist Marc Levesque, that this budget will result in higher interest rates, increased business lending costs and dearer mortgages for homeowners.

This budget deserves to be defeated, as do its sell-out authors.