Saturday, September 1, 2012

Canadian interest rate forecast September 2012 ‎

Canadian interest rate forecast September 2012, cad forecast sept 2012 ‎: Canada’s economic prospects should improve in tandem with the U.S. and the rest of the global economy over the next two years. In the meantime, a growth slowdown has materialized in Canada and looks to extend into 2013. Most recent data on employment, manufacturing, housing sales, and retail sales were on the downside.

Second quarter 2012 real GDP growth is estimated at 1.5 per cent compared to 1.9 per cent in the first quarter. Exports continue to grow during this recovery but the surge in automotive exports following the earlier supply disruptions is ending, which will leave total exports subject to current softer demand conditions.

In addition, the country’s merchandise trade deficit will likely worsen under the high Canadian dollar since it not only hinders exports but it facilitates imports. Real or price-adjusted imports have consistently outpaced exports since 2002 when the CAD was at its low with the USD. A trade deficit means a net outflow of income and results in lower economic growth.

Canada’s current slowdown will extend into the third quarter. A modest uplift is expected in the fourth quarter but another growth slowdown phase is likely in the second half of 2013 when U.S. fiscal tightening slows that economy. Growth in 2013 is downgraded to 2.0 per cent from 2.1 per cent. A stronger global economy will lift Canada’s growth to 2.6 per cent in 2014. Forecast risk is on the downside for the rest of 2012 and through 2013.

The lingering effects of the financial crisis on the U.S. economy combined with Europe’s worsening economy and several potentially inadequate key policy decisions in those countries could mean a weaker economy. Add to this backdrop one or more unexpected and sometimes random natural events that hurt the economy and the economy bounces around a sluggish growth trend.

Upside risks could be considerable if policymakers in Europe initiate substantive measures to deal with their sovereign debt problems and adopt growth-enhancing measures. Similarly in the U.S., politicians need to effectively deal with their fiscal problems both short and long term.


The 12-month rate of CPI inflation slowed to 1.3 per cent in July, from 1.5 per cent in June and fell 0.1 per cent from June after decreasing 0.2 per cent the previous month.

The downward trend in CPI continued for the third straight month. The Bank of Canada’s core CPI was unchanged in July and was up 1.7 per cent from last July. Inflation will remain a non-issue for the Bank of Canada as long as excess capacity or a negative output gap exists in the economy.

A run-up in food prices due to the U.S. drought will take time to work its way through but higher food prices should boost headline CPI next year. The Bank’s core measure excludes some food items and it will not be moved by this temporary run-up.

Interest rates

Bond yields climbed 20 to 40 bps, depending on maturity term into mid-August from their July lows but reversed direction thereafter and retraced about 10 to 15 bps. Short market rates also moved up, though by a lesser amount since T-bill rates are anchored by the Bank of Canada’s policy rate.

Nonetheless, the Bank was prompted to engage in a Special Purchase and Resale Agreement of $370 million on August 16 in an effort to keep the overnight rate on target.

Market sentiment improved on better than expected U.S. payroll employment and retail sales data and a statement by the ECB president to support the euro along with plans for new sovereign bond buying program. Sentiment turned negative thereafter.

The only change in administered rates according to the Bank of Canada was a 10 bps increase late in the month to the posted three-year term mortgage rate to 4.05 per cent.

Monetary policy

No rate announcement was scheduled in August but the Governor of the Bank of Canada in a speech reiterated that some withdrawal of monetary stimulus would be forthcoming under the right conditions.

Based on the Bank’s economic forecast, those conditions could materialize around mid-2013 prompting it to act before the negative output gap closes by the end of 2013. The Bank is keen to raise rates.

The U.S. Federal Open Market Committee (FOMC) meeting did not generate additional monetary easing, though expectations are high. Some observers anticipate QE3 or some other unconventional monetary policy action such as buying MBS securities as early as September. The Fed will likely wait until after the election to act since the recovery is still intact and to avoid seen as politically inspired.

Interest rate forecast

An event-filled September will move bond yields in both directions and sometimes in large daily moves. Volatility aside, the trend in rates will be flat or trendless for another three or four quarters before some upward movement materializes later in 2013 and into 2014.

The futures market for three-month Bankers Acceptances is pricing a 25 bps rate increase around the first quarter of 2014 and about 50 bps by the end of 2014. However, the consensus economic forecast sees a 25 bps increase in Q3-2013 and 50 bps by the end of 2013.

This forecast puts the first BoC 25 bps increase in September 2013 followed by another in October before pausing into 2014 to assess the impact of those increases and on less than stellar economic prospects. Five-year posted mortgage rates have room to decline 10 to 15 bps in the near term and if the wide spread off the cost of funds does not prompt this move then perhaps the softening housing market and weakening mortgage demand will.


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