Inflation rate hits six-month low

March 19th, 2008

Thought this might be an interesting article to post. Canada is starting to post numbers showing that things are fairly stable here in comparison to the US and the world.

I find this particularly interesting given the most recent Federal Reserve rate drop of 75 bps. From last weeks post, we can see that the economist Ben Tal’s prediction of a full point rate drop before year end is only 25 bps away from being true. It will be interesting to see if Canada follows suit or stays put given the low inflation rate (which is always a trailing indicator).

On the mortgage rate side of things, banks are inching lower each week to try and match or better than prime. I’d say it will be about another month before fixed rates are down to prime and another month before they start competing with the variable rates. Variable rate discounts are also starting to see an increase (that’s an increase in the discount). Things aren’t nearly so tight as they were just a month or so ago.

The snow is starting to melt and folks will be back to looking at & buying houses soon, which will stimulate the economy.

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TAVIA GRANT

Globe and Mail Update

March 18, 2008 at 8:23 AM EDT

Canada‘s inflation rate is the most sluggish in six months thanks to a strong dollar, leaving plenty of room for the Bank of Canada to keep cutting interest rates if economic conditions worsen.

The annual rate eased to 1.8 per cent last month, Statistics Canada said Tuesday, as car and car rental prices tumbled at the steepest pace in more than half a century. That said, the more stable core rate edged higher to 1.5 per cent on higher home costs.

Overall inflation has been easing in recent months though, and was markedly slower than January’s 2.2-per-cent pace, leaving the central bank the option to cut rates if market turmoil spreads and the economy deteriorates further.

Canadian inflation remains “comfortably within the Bank of Canada’s target range,” said Douglas Porter, deputy chief economist at BMO Capital Markets, in a note. “There may be less urgency to cut rates in Canada than stateside, but the bank still has plenty of leeway to do what they see fit in the months ahead.”

Inflation is likely to stay weak for the next few quarters, bottoming out at just over 1 per cent by the middle of the year, said Jacqui Douglas, economics strategist at TD Securities, who expects “a string of further 50 basis-point rate cuts over the next three meetings.”

Canadian inflation remains well below other countries. The average among OECD countries is 3.5 per cent and in the U.S., it’s running at 4 per cent.

February’s cooling stemmed from less upward pressure from gasoline prices along with tumbling car prices, the report said.

Buying and leasing a car was 6.8 per cent cheaper, the fastest decline since February, 1956, as many dealers cut prices to match U.S. rivals. Factories lowered their suggested prices and dealers discounted 2008 models ahead of the arrival of 2009 models – something that normally only happens later in the year.

Food inflation is a growing problem around the world, but that strong dollar is making Canada an anomaly. Fresh vegetable prices saw their biggest drop in 12 years, with a 16.9-per-cent drop from last year’s level thanks to the loonie. Prices were relatively higher last year, due to a California frost.

Fresh fruit prices tumbled 14.5 per cent, led by a slide in oranges and grapes.

Computer equipment and supplies prices continued to fall, led by laptops, and so did women’s clothing.

Economists had expected inflation to cool to 1.8 per cent and a core price increase of 1.2 per cent.

On the flip side, gasoline prices were 17.1 per cent higher this February than last as world crude oil prices rocketed, though that’s down from the previous month’s 20.9-per-cent increase in gasoline.

Housing costs also got more expensive. Mortgage interest cost climbed 8.1 per cent last month, a pickup from January and the eighth straight monthly acceleration. The gain stemmed more from higher new housing prices than a rise in mortgage renewal rates, the report said.

Homeowners’ replacement cost, which represents the cost of maintaining a home, rose 4.8 per cent, the second month in a row of increases.

“Builders reported higher labour costs, as well as increases in the cost of certain materials, such as concrete, roofing, exterior siding and heating equipment,” Statscan said.

Among provinces, Ontario consumers experienced the fastest slowdown in consumer prices. As in previous months, inflation was especially strong in Alberta and Saskatchewan.

On a monthly basis, higher hotel and tour prices sent consumer prices 0.4 per cent higher in February after a GST cut prompted a previous monthly 0.2-per-cent drop.

Philip Beer, AMP

Street Capital Financial Corporation

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And The Prime Keeps Tumbling Down

March 7th, 2008

As posted previously, prime rates were expected to drop significantly.

I posted an article from Ben Tal, economist with CIBC. He predicted some significant rate drops as a direct result of the fall out in the US sub-prime market.

Given the half point drop by the Bank of Canada this week, I’m going to have to give him some credibility on his prediction. He’s still calling for another half point drop before this is all said and done.

What does this mean to the average mortgage holder? Coming up very soon if you are in a fixed position, you might want to do the math and see if the interest penalty (usually 3 months) or the interest differential (careful on this one it tends to be posted rate minus full discounted rate) end up saving you money in the long run. Think of it as short term pain for long term pain.

Do you have the cash today to save you thousands in interest over the next 5 years? Are those thousands greater than the penalty you pay?

For those in variable or adjustable rate mortgages, you folks are sitting pretty relaxed right now.  Prime is dropping and so are your mortgage payments.

For folks buying their first home, I’m really leaning them towards getting a variable rate. Take advantage of the lower rate, prime minus up to 75 points or (4.5%) and wait for the fix rates to drop to match over the coming months. When they do, lock in at a great rate.

No one is saying it, but I have to think we’re going to be in this mode for awhile at least while we await the rest of the fall out from the sub-prime market. It’s slowly spilling over into other markets. Hard to avoid that whole scenario really. It’s got to affect many other markets before it gets any better.

Certainly will be interesting to see what happens in the US and at what point the real estate market at least starts to recover.

Meanwhile, back here in Canada, we’re still being painted with the same brush. Canada can’t be that different from the US can it? TD Canada Trust is certainly doing it’s best to tell the world that it has NO write downs as a result of the meltdown south of the border. Every other bank however is talking in the Billions (yes with a “B”). Ouch!

With the slow down in the US economy, it has to affect us. Despite actions to increase trade with other countries, we’re still each others largest trading partners.

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