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Bank of Canada: the rise of the interest rates will be slower

Bank of Canada: the rise of the interest rates will be slower

With the statistics that are piling up on their desk and which all tell about the same story, one of an economic recovery slower than envisaged, the economists of the large Canadian banks bring out their calculators again. And they currently re-examine on the downside their forecasts of rising rates on behalf of the Bank of Canada.


In a study made public, the economist-in-chief of the Bank CIBC, Avery Shenfeld, even maintains that the key interest rate of the Bank “will not be higher than 2% by the end of 2011”. That is 25 basic points less than at the time of his last forecast.


According to him, the Bank will announce an increase in the key interest rate of 1% in September, but it will pass its turn as of October.


Mr. Shenfeld simultaneously predicts that the American Central Reserve will remain on the same level from now on until the end of 2012 “at the earliest”, with its rates oscillating between 0% and 0,25%. “Canada, he writes, cannot entirely bring its rates to a normal level as long as the Fed does not move. ”


At Desjardins, the chief economist Mathieu D’Anjou confirms that the institution from Lévis also re-examines its scenario. The co-operative keeps its forecast of 2,5% for the end of 2011, but now expects that Mark Carney’s team will take “a break of approximately six months” from the beginning of next year onwards because of the slower economic growth. Before, this break was envisaged for the middle of next year.


“The Bank will wait until it will be clear that the American economy will come out of its recession and that the Fed will increase its rates”, underlines Mr. D’Anjou.


This forecast of 2,5% for the end of 2011 is also the one of TD Bank Financial Group. But Pascal Gauthier, its economist-in-chief, recognizes that that could be “perhaps modestly less”. “The risks at present are such that the leaders of the Bank of Canada take a little more moderate rhythm (in the increase of the rates), he says. But it should be remembered that, even at 2,5%, this is a rate which is very stimulatiing for the economy. ”


An effect on the mortgages?


Future home buyers or those who want to renew their mortgage can wonder what this probably slower progression of the rates will mean for them. “For the five-year mortgage, one thinks that that is not badly reflected in the rates offered”, underlines the economist of Desjardins.


Winners could be those who have a fluctuating mortgage rate, he continues. “That will go up a little, but it will remain very low from a historical point of view. ”






The loonie lowered


In its preceding forecasts, the CIBC envisaged that the loonie was going to finish the year above parity, at 1,01$US. Yesterday’s forecast shows it in a much weaker posture, at an equivalence of 95 cents US.


The reason of this 6 cents US disparity comes from the surprise effect which will hit the markets in October when the Bank of Canada decides not to raise its rates, according to Mr. Shenfeld. “A rise in October would have made eyebrows frown and made realize that the Bank of Canada was ready to raise its rates, which would have made the loonie rise. Now, one expects the opposite effect”, he thinks.


At the end of 2011, he envisages that the loonie will be at parity with the American dollar, against a forecast of 1,02$US previously.

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