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Banks unlikely to pass on any rate cut: Analyst

Bank of Canada Governor Stephen Poloz may cut a key rate Wednesday, but don’t expect to pay less for your mortgage or auto loan.
By: Dana Flavelle Economy, Published on Tue Jan 19 2016
Don’t expect your mortgage or car loan to get much cheaper if the Bank of Canada cuts its trendsetting interest rate Wednesday, a bank analyst warns.
Canada’s major lenders are unlikely to match the central bank’s lead fully, if, in fact, Governor Stephen Poloz cuts the rate, which is still an open question, CIBC World Markets analyst Robert Sedran said in a report to clients Tuesday.
Years of record low rates have squeezed the chartered banks’ profit margins, leaving them with little room to manoeuvre, Sedran explained.
The last two times the central bank cut its rate in January and July of 2015, by 0.25 percentage points each time, most big banks trimmed their lending rates by less than half that, he noted.
Heading into Wednesday’s closely watched rate-setting meeting, the odds of a further 0.25 point cut were still seen as too close to call.
A cut would bring the bank rate back down to the record low seen after the financial crisis of 2008-09.
“If the (central) bank does decide to move another 25 basis points, we think the balance of probabilities suggests a small decline in prime from the banks (perhaps five or 10 basis points), with a non-zero probability that the banks leave their prime rates unchanged,” Sedran wrote.
“As the overnight rate gets closer to zero, margin pressure becomes more acute and especially in a year in which loan losses would appear set to begin rising, we think bankers will be — and should be — very focused on protecting their revenues.”
A growing number of private-sector economists have said they expect the central bank to lower its rate in response to deteriorating economic conditions.
Amid a glut of crude oil that has seen the global price fall by 70 per cent in 20 months and concerns about China’s slowing growth rate, Canada’s economy has displayed renewed signs of slowing.
Rate cuts normally stimulate economic activity by making borrowing cheaper, both for consumers and businesses.
However, economists have cautioned that a rate cut at this time could do more harm than good by exacerbating the Canadian dollar’s rapid decline, undercutting consumer confidence.
In a fresh warning about household debt levels, Ottawa’s Parliamentary Budget Office said Tuesday that Canadians’ household debt-to-income ratio will hit a record 174 per cent later this year, up from 171 per cent at the end of last year.
That means Canadians owe $1.74 for every dollar of after-tax income they earn. (The report used slightly different metrics than Statistics Canada, which said the ratio hit a record 163.7 per cent in the fall of 2015.)
High debt loads make Canadian households more vulnerable to negative shocks such as job losses or rising interest rates, the budget office warned.
Consumers are feeling the impact of a falling dollar at the grocery store, where $8 cauliflower has become a talking point.
As well, the falling dollar has blunted some of the impact of savings at the gas pump as crude oil is priced in U.S. currency. Refinery profit-taking has also been a factor.
The cost of spending the winter in Florida is also higher.
Prices for other goods are also expected to rise eventually as retailers pass through the higher cost of importing items priced in U.S. dollars.
At the moment, the cost of shopping in the U.S. with Canadian dollars is probably higher than buying the comparable goods in Canada, says Doug Porter, chief economist with BMO Bank of Montreal.
Poloz has recently mused on the possible use of extraordinary measures in times of economic crisis, including quantitative easing and negative interest rates.
Quantitative easing, which would see the central bank make major asset purchases, in the form of things such as government bonds, would help lower long-term lending rates. Negative interest rates would encourage banks to lend by making it costly for them to sit on their money.
The case for and against a rate cut
PROS
• The economic outlook appears to be worsening. The price of Western Canadian Select, an Alberta oil-sands benchmark, has declined by half since the central bank’s October policy update while the Canadian dollar has depreciated by about 10 per cent.
• The Bank of Canada’s latest Business Outlook Survey showed investment and hiring intentions had fallen to their lowest level since the financial crisis of 2008-09.
• Crude oil continue to fall. As an oil exporter, Canada’s economic prospects continue to weaken, especially in the oil-producing provinces of Alberta, Saskatchewan and Newfoundland and Labrador. A rate cut could soften the blow by providing by encouraging consumers and business to borrow and spend, thus boosting economic activity.
• The sagging price of crude has pulled down the dollar, which should help boost exports. But the positive impact on Ontario’s manufacturers is lagging the more immediate negative impact of spending cuts and job losses in the energy sector.
• Concerns about China’s slowing growth rate have put global financial markets in a tailspin. The Toronto Stock Market’s benchmark index is down nearly 8 per cent since the start of the year.
CONS
• A rate cut could further depress the dollar and undermine fragile consumer confidence.
• The Liberal government in Ottawa says it will boost spending on infrastructure in its March budget. That could give the economy the lift it needs without a rate cut. At the very least, the Bank of Canada could hold on until after the budget is released.
• It’s unclear whether the full benefit of two previous quarter point rate cuts, in January and July of 2015 has worked its way through the wider economy.
• A low Canadian dollar is providing less of a boost to exports than in the past because Mexico, a lower-cost producer, is now also a major U.S. supplier. And the Mexican peso has also depreciated against the U.S. dollar. A further rate cut won’t help.
• Rate cuts encourage consumers to load up on debt, already at record levels, leading to potential problems down the road when rates rise. At the same time, rate cuts do little to stem the bleeding in the energy sector.

Economists warn rate cut could erode confidence in loonie

TIM SHUFELT
16:35 EST Monday, Jan 18, 2016

A potential rate cut by the Bank of Canada this week risks undermining confidence in the Canadian dollar, some prominent Canadian economists have warned.
Never before has the loonie fallen so far, so fast, against the U.S. dollar as over the past two years.
“Currency instability has become a concern, and we think the Bank of Canada must take note,” National Bank Financial chief economist Stéfane Marion said in a report on Monday.
“In our view, the Bank of Canada would be better to keep its powder dry this month and act, if need be, after the next federal budget when it will be better able to assess fiscal support to the economy.”
Trading in overnight index swaps currently implies the probability of a rate cut at about 60 per cent when the Bank of Canada releases its monetary policy report on Wednesday.
Economists calling for the key overnight lending rate to be maintained at 0.50 per cent say additional stimulus could test consumer sentiment. A cut to 0.25 per cent as expected by the market could bring about a “runaway exchange rate,” said Avery Shenfeld, chief economist at CIBC World Markets.
“The unprecedented pace of its decline risks an even larger hit to growth by shocking household confidence,” Mr. Shenfeld said in his weekly economic commentary on Friday.
He noted that the exchange rate serves as a barometer of the economy for many Canadians.
With the cost of travelling to the U.S. suddenly prohibitive to many, and the price of cauliflower a national talking point, the currency’s withered stature is very much on the mind of the average Canadian consumer.
Over the past two years, the Canadian dollar has lost a full 25 cents in value – a downward slope unmatched in steepness, Mr. Marion said.
Certainly, a great deal of downside is to be expected considering Canada’s current economic circumstances. Prices for crude oil and other resources such as copper are sinking to multi-year lows and domestic economic growth appears to be stagnating. Meanwhile, the U.S. dollar has been gaining considerable strength against major currencies worldwide.
But the losses should have been more like 10 cents, not 25 cents, Mr. Marion said. “Is the loonie out of whack with its fundamentals? We think so.”
While there are benefits to households, most notably through lower energy prices, the rising costs of imports are also passed through to consumers, who are finding some fruits and vegetables far more expensive these days. The effect is “fast eroding standards of living,” Mr. Marion said.
Another rate cut could erode consumer sentiment, both through additional currency depreciation and for the economic adversity a rate cut telegraphs, said George Davis, chief technical analyst at RBC Dominion Securities.
“Anecdotally, we’re already seeing some signs of erosion in consumer confidence.”
On the corporate side, a depreciated currency helps the beleaguered energy sector by making exports more attractively priced, all else being equal.
A further rate cut is needed to keep the dollar low, maintaining that cushion, veteran Canadian economist Ted Carmichael said in a blog post.
He sits on C.D. Howe Institute’s monetary policy council, which called for the Bank of Canada to hold rates as they are. There are four chief economists of Canadian chartered banks on the council, all of which advised against a cut.
Mr. Carmichael’s dissent said currency fears are overblown, and the idea that the loonie has fallen too far fails to grasp the magnitude of the commodity correction.
“I don’t think many people recognize that Canada’s commodity terms of trade in January, 2016, are 28 per cent weaker than they were at the lowest point of the Great Recession of 2008-09,” he said.

What Ontario’s new probate rules mean

“Valuing an estate for probate used to be relatively simple in Ontario: executors entered the total value of the estate on the application for probate, signed an accompanying affidavit stating the valuation was correct, and that was usually that.
Not anymore. As of January 1st, Ontario executors (known as estate trustees) must file an Estate Information Return detailing the valuation of specific assets in an estate, which affects both executors and testators.” – Advisor to Client

For full article click on the link below:
http://client.advisor.ca/financial-planning/what-ontarios-new-probate-rules-mean-for-executors-13290?print

‘Close call’ for Poloz as rate decision looms

DAVID PARKINSON
18:23 EST Sunday, Jan 17, 2016

A year ago at this time, Bank of Canada Governor Stephen Poloz stunned the financial markets with a surprise interest-rate cut in the teeth of a tumbling oil price and a slumping economy. Now, with oil’s renewed slide threatening to derail Canada’s 2016 economic prospects, the markets are steeling themselves for a repeat performance from Mr. Poloz this week – though it’s far from a sure thing.
“Consensus is divided. Markets are increasingly expecting a cut. Nobody is telling a story with great conviction. Governor Poloz doesn’t sound like he’ll cut, but maybe he will. It’s not the least bit clear that the benefits outweigh the costs,” Bank of Nova Scotia economist Derek Holt wrote in a research report.
The Bank of Canada will announce its latest interest-rate decision on Wednesday, the first of eight scheduled rate announcements throughout the year.
Up until a couple of weeks ago, it was assumed that the central bank would leave its key rate unchanged at 0.5 per cent, where it has sat for the past six months after a pair of quarter-percentage-point cuts in January and July, although the bank was expected to trim its outlook on the economy. But after a week of further losses in oil and the Canadian dollar, as well as new evidence of the growing unease weighing down Canada’s corporate sector, central bank watchers have come around to a real possibility that Mr. Poloz will cut his rate again this week.
The market is still fairly split on the matter: The yields on overnight index swaps in the bond market imply that traders, as of Friday afternoon, were pricing in a 62-per-cent chance of a cut in Wednesday’s decision.
“It’s still a close call, one we would not day-trade on,” said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce.
But just a week earlier, they were pricing in a 15-per-cent chance of a cut. The sea change in thinking was triggered by last Monday’s release of the Bank of Canada’s quarterly Business Outlook Survey. The report revealed a marked deterioration in sentiment among Canadian businesses, as the ill effects of the global commodity slump are weighing on investment and hiring intentions, as well as inflation expectations, and are increasingly infecting the non-resource economy. That put the possibility of a near-term rate cut firmly on the table, as Mr. Poloz has always given considerable weight to business sentiment in his approach to monetary policy.
Heightening those concerns is the continued slide of oil prices. Conditions for the energy sector, and everything affected by it, have worsened considerably since the Business Outlook Survey was conducted in late November and early December. In the six weeks since the survey was completed, the price of West Texas intermediate crude has fallen by nearly $8 (U.S.) a barrel, or more than 20 per cent. That has triggered another big sell-off in the Canadian dollar, which dipped below 69 cents on Friday – sparking new concerns that a currency-related rise in costs for imports, especially food, will squeeze Canadian consumer spending.
Still, in recent public comments, Mr. Poloz hasn’t given off the sense of a central banker who’s leaning toward cutting. In his news conference following a Jan. 7 speech, he remained relatively upbeat about Canada’s prospects for an economic recovery fuelled by non-resource export growth. And in the speech itself, he stressed that a flexible exchange rate is the most effective tool to help absorb the shock Canada’s economy is going through. The implication is that he may consider that the currency’s most recent declines will provide the needed stimulus to foster that non-resource export resurgence – perhaps making another rate cut not only unnecessary, but counterproductive.
“The Canadian dollar has already taken a mighty blow, and a further rate cut would risk a much deeper slide … which could ultimately do more harm than good for the economy,” Bank of Montreal economists Douglas Porter and Benjamin Reitzes said in a research note.
At least as important as the interest-rate decision itself will be the bank’s Monetary Policy Report, its quarterly update of its outlook for the Canadian and global economies, which will be released simultaneously with the rate announcement. The bank’s estimates for Canadian economic growth contained in its October MPR – 1.1 per cent for 2015 and 2 per cent for 2016 – now look overly optimistic, given the economy’s deteriorating fundamentals. Most economists now think the economy will be lucky to grow by more than 1.5 per cent this year.
If the Bank of Canada’s forecast agrees with that view, it would suggest that the economy will grow below the pace necessary to absorb the economy’s excess capacity. That would imply that even if it doesn’t cut its rate now, another cut would soon be in the cards unless conditions improve.
“Even if the bank doesn’t actually cut, they will certainly use language to convey a much higher likelihood of a rate cut ahead,” Mr. Shenfeld said.

Eight reasons why a Bank of Canada rate cut is a bad idea

ROB CARRICK
17:26 EST Sunday, Jan 17, 2016

For eight years, the Bank of Canada has been trying to encourage economic growth by lowering interest rates. It’s so not working.
In fact, lower rates are hurting a lot of people more than they’re helping. We have to at least acknowledge this as speculation of yet another rate cut grows. It could come as soon as Wednesday, which is the date of the next rate announcement from the Bank of Canada.
The central bank considers the entire economy when it sets rates. Now, let’s look at things from the point of view of everyday people. Here are eight reasons why the Bank of Canada shouldn’t cut rates any lower.
1. The dollar will fall even more: The most disruptive force in personal finance right now is the falling dollar. That’s because it’s hitting us all in a vulnerable spot – our grocery bill. Helpful for exporters, a weak loonie is a tax on families and snowbirds who must change Canadian dollars into U.S. currency. Last week, the dollar fell below 70 cents (U.S.) for the first time since 2003. A lower dollar adds downward momentum.
2. It’s bad for seniors: By causing the price of imports to rise, a falling dollar puts upward pressure on inflation. If you’re a senior on a fixed income, inflation is your worst enemy. Usually, we get higher interest rates along with inflation. No such luck today.
3. It’s bad for consumer confidence: Things are going wrong in so many aspects of personal finance these days – the stock markets are falling, the dollar is weak, grocery bills are rising. Cutting rates tells people that things are deteriorating even more. Worse, the Bank of Canada appears to be shooting blanks in lowering rates. If the Bank of Canada cuts its overnight rate by 0.25 of a percentage point, it would take the benchmark back to 0.25 per cent. The last time the bank reduced rates to that level was during the height of the financial crisis in early 2009.
4. It’s going to hurt savers: The usual rate cut of 0.25 of a point sounds small, but it would put downward pressure on savings-account rates that have been slinking lower for years and are well below 1 per cent in many cases. A few alternative banks and credit unions have remained above that level, but they may not hold on much longer if the Bank of Canada is cutting. Lower rates penalize people doing the right thing with their money – saving.
5. Young minds are being warped: We are raising a generation of young adults who believe that interest rates are as dangerous as puppies and kittens. Rates either hold steady or fall. Rise? Never. Millennials know we had higher rates in the past, but then again, we also had dinosaurs. The danger here is that people buy houses they can only afford at today’s low mortgage rates and then must contend with higher rates later on. Don’t laugh. It could happen.
6. It encourages more borrowing: Consumers have carried the economy by taking advantage of low rates to buy houses, cars and more. Now, we have historically high rates of debt and an economy with a wobbly recent history of job creation and wage growth. Low rates are also meant to encourage Corporate Canada to spend and invest, but an uncertain economy undercuts that enticement.
7. It provides cover for banks to pad profits at the expense of clients: When the Bank of Canada twice cut its overnight rate by 0.25 of a point last year, the banks reduced their prime lending rate by only 0.15 of a point each time. Does the Bank of Canada really intend to stimulate both the economy and bank bottom lines?
8. It would recklessly stoke the housing market: As far as housing is concerned, low rates are the finance version of performance-enhancing drugs. Pumping yet another rate decrease into the market isn’t healthy. Also, TD Economics says another cut would likely offset the effect of mortgage changes that are designed to cool hot housing markets in Ontario and British Columbia. The changes start Feb. 15 and will raise the minimum down payment to 10 per cent from 5 per cent for the portion of a house price that costs more than $500,000.


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