RBC released its Canadian Consumer Outlook Index today which reported that despite continuing reports stating the economy is recovering quickly, Canadians are worried about their debt levels and are anxious about their jobs.

The Bank of Canada reported last week that consumer credit held by the big banks rose in December 2009 to $336B amount of consumer credit held by the country’s chartered banks rose to $335.6-billion in December, up $2B from the previous month and 15% over the previous year. It really has been an odd few years with the global economic crisis bringing down Lehman Brothers, bank bailouts around the world and it was the first recession in which real credit (or the level of debt people are taking on adjusted for inflation) has gone up.

The survey said that 58% of Canadians are concerned about their current level of debt. And when people are worried about having taken on too much debt, the last thing they need is to lose their jobs, and the survey also found that 26% say a member of their household is worried about losing their job or being laid off, which jumped up from 21% the previous month. Job security concerns were up in all provinces with the highest reported in BC (32%) and Alberta (31%).

Conversely, 45% of Canadians expect that their personal financial situation will improve over the next year, and 68% believe that interest rates will increased in the next 6 months while 28% believe they’ll remain the same.

Canadian Imperial Bank of Commerce chief economist Benjamin Tal commented that it looks like many people are over their head in debt and will be in trouble when interest rates rise. With rates at near all time, especially mortgage rates it has brought demand for big ticket items such as houses forward, meaning people looking to buy a house in the next year are rushing to get into the market now, and this will reduce activity in 2011.

The Bank of Canada announced this morning that it is keeping the main interest rate, its target for the overnight rate at 0.25%. It also maintained its commitment to keep rates at their current levels until the end of Q2 2010, but again stated that the Bank retains considerable flexibility to change if inflation (or the housing market) gets out of hand.

In the announcement they said that the global economic recovery has started, mainly due to improving financial conditions and stronger demand domestic demand growth in many emerging-market economies. While the outlook for global growth through 2010 and 2011 is somewhat stronger than the Bank had projected in its October Monetary Policy Report, the recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems.

Canada’s economy grew in Q3 2009 and is believed to have grown even more in Q4 2009, while total CPI inflation was positive in the last quarter, the core rate of inflation has been slightly higher than expected recently. Nonetheless, the Bank believes the economy was operating 3.25% below capacity in Q4 2009.

Canada’s economy is expected to return to full capacity, with 2% inflation, in Q3 2011, while the economy will grow:

Factors driving the recovery:

Factors creating a drag on economic activity:

These factors have shifted the balance to domestic demand growth and away from net exports.

No mention was made of the potential housing bubble that everyone is talking about after CREA’s latest report citing December 2009 as the highest month of housing sales on record.

The Governor of the Bank of Canada, Mark Carney, gave a speech in Toronto today regarding the Current Issues in Household Finances.

Here are some of the highlights:

Overview

1. Feedback between financial markets and the real economy has reversed direction

2. The inventory cycle has turned and housing sectors are stabilizing.

3. Considerable fiscal expansion and monetary stimulus are supporting domestic demand.

Canadian households

Households and Financial Stability in Canada

Stress Testing the Canadian Household Sector

As you can see in the table above the Bank’s stress test involves the major interest rate (the target for the overnight rate) rising as follows:

Scenario 1

1 year (Q4 2010) = + 1.25%
2 year (Q4 2011) = + 2.85%

Scenario 2

1 year (Q4 2010) = + 1.25%
2 year (Q4 2011) = + 3.75%

Conclusion

So in closing Mark Carney believes that we’ve help up through the storm, he isn’t too worried about a “housing bubble” and re-itereated the Bank’s conditional commitment to keep current interest rates low until Summer 2010 as long as inflation stays within 2%. We are enjoying a time of extremely low interest rates and households need to plan an increase of up to 3-4% over the next couple of years to ensure they don’t get into trouble.

Another article in the Toronto Star’s series on credit cards covered what the outrageous interest rates being charged actually cover:

The Canadian Bankers Association says there is no direct relation between the Bank of Canada’s key interest rate, which influences the commercial banks’ prime rates, and consumer rates on credit cards.

In fact, the Bank of Canada rate represents less than 1 per cent of banks’ overall funding costs, it says.

Many factors go into setting credit-card interest rates, including:

“Credit-card interest rates tend to be higher than other loans because there is no collateral involved so there is a higher risk for the issuer,” the association says.

Its president and chief executive officer, Nancy Hughes Anthony, also stresses that the vast majority of Canadians pay no interest at all.”They pay zero because … 70 per cent of Canadian households regularly pay off their credit card balances in full every month,” she said.

Bank of Canada maintains overnight rate target at 0.25% and reiterates conditional commitment to hold current policy rate until the end of the second quarter of 2010

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/4 per cent. The Bank Rate is unchanged at 1/2 per cent and the deposit rate is 1/4 per cent.

They cited the following reasons for this interest rate decision:

• While significant fragilities remain, global economic developments have been slightly more positive and the global outlook has improved modestly relative to the Bank’s projection in its October Monetary Policy Report (MPR).
• Expected demand is moving towards net aggregrate demand and away from net exports which in Q32009 resulted in weaker GDP growth
• Core inflation in recent months has been slightly higher than the Bank had projected, although total CPI inflation remains close to projections.
• The drivers and profile of the Canadian economy remain the same as the Bank’s MPR report in October 2009.
• They expect the growth and recovery to continue along with inflation to return to the 2% target in Q2 2011
• If outlook remains within the desired range then the target overnight rate can be expected to remain at its current levels until Q2 2010, although the Bank “retains considerable flexibility” – this is great news for variable rate mortgage holders and shoppers looking for variable rates as this means they shouldn’t increase until next summer. Also, as members of Mortgage Rate Outlook Panel highlighted, that further discounts to variable rates are to be expected.

Main risks to inflation are:

Upside:

Downside:

The Reserve Bank of Australia increased the official cash rate from 3.25 to 3.5 per cent yesterday, in a move that was widely predicted by the financial markets, although there was a slight chance that the central bank might have ordered a more aggressive 50-basis-point hike.

It seems that inflation is going to be a concern and major focus for many countries as the global economy pulls itself out of this recession. In Canada, people are talking about having to plan for a 2.0%-2.5% interest rate increase over the next few years.

However, concern that the RBA’s rush of rate rises would continue next month and into next year was pared back after a statement from RBA governor Glenn Stevens that many economists interpreted as dovish.

“With the risk of serious economic contraction in Australia now having passed, the board’s view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker,” Mr Stevens said.

“The adjustments at the October and November meetings will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.”

The statement prompted the interest rates markets to shift dramatically, trimming back the chance of a rate rise at the last meeting before Christmas.

The interbank futures market predicts the prospect of a third hike in December is 58 per cent – virtually a line-ball call – while the number of hikes likely in the current tightening cycle has also been reduced.

It had been expected that there would be up to 210 basis points, more than eight rate rises, in the official cash rate in the next year. However, that has now been sliced back to 160 basis points as the market lost confidence the RBA would act rapidly.

The four major banks each passed on the 25 basis point increase to standard variable mortgage rates almost immediately but the ANZ’s acting chief executive for Australia Graham Hodges warned the increase still did not match the extra costs of higher wholesale funding costs.

The Bank of Canada announced today, October 20, 2009, that they will maintain the overnight rate target at 0.25% and said they will keep their conditional commitment to hold the current rates until the end of Q2 2010, which is great news for the long term outlook for variable mortgage rates.

Here is the full announcement:

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight interest rate at 1/4 per cent. The Bank Rate is unchanged at 1/2 per cent and the deposit rate is 1/4 per cent. Recent indicators point to the start of a global recovery from a deep, synchronous recession. Global economic and financial developments have been somewhat more favourable than expected at the time of the July Monetary Policy Report (MPR), although significant fragilities remain.

A recovery in economic activity is also under way in Canada. This resumption of growth is supported by monetary and fiscal stimulus, increased household wealth, improving financial conditions, higher commodity prices, and stronger business and consumer confidence. However, heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures. The current strength in the dollar is expected, over time, to more than fully offset the favourable developments since July.

Given all of these factors, the Bank now projects that, relative to the July MPR, the composition of aggregate demand will shift further towards final domestic demand and away from net exports. Growth is expected to be slightly higher in the second half of this year than previously projected but to average slightly lower over the balance of the projection period. The Canadian economy is projected to grow by 3.0 per cent in 2010 and 3.3 per cent in 2011, after contracting by 2.4 per cent this year. This is a somewhat more modest recovery in Canada than the average of previous economic cycles.

The Bank now expects that the output gap will be closed in the third quarter of 2011, one quarter later than it had projected in July. Correspondingly, inflation is also expected to return to the 2 per cent target in the third quarter of 2011, one quarter later than in July’s projection.

While the underlying macroeconomic risks to the projection are roughly balanced, the Bank judges that, as a consequence of operating at the effective lower bound, the overall risks to its inflation projection are tilted slightly to the downside.

Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target. Consistent with this conditional commitment, the Bank will continue to conduct longer-term Purchase and Resale Agreements based on existing terms and conditions and according to the accompanying schedule: http://www.bankofcanada.ca/en/notices_fmd/2009/notice_fad201009.pdf.

In its conduct of monetary policy at low interest rates, the Bank retains considerable flexibility, consistent with the framework outlined in the April MPR.

Information note:

A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on Thursday, 22 October. The next scheduled date for announcing the overnight rate target is 8 December 2009.

Laurentian bank released a report earlier in the week outlining how they believe that the Canadian government will be forced to aggressively increase interest rates next year versus a slow, gradual return to “normal” rates.

They believe that:

The Bank of Canada announced this morning, September 10, 2009, that it is maintaining the overnight rate target at 1/4 per cent and says it is intent on keeping the promise to keep the main interest rate at this level until June 2010.

The Bank also announced that:

The fact that the Bank believes that GDP growth in the 2nd half of next year could be stronger than earlier thought while inflation remains under control is great news for us, and helps the notion that perhaps the worst of the economic news is behind us. Let’s hope so.

The Bank of Canada (BoC) announced this morning that it is keeping its target overnight rate, the main influential interest rate in Canada, at 1/4%. They also said that they are commited to trying to hold this rate steady until the end of Q2 2010 or July 2010.

In the release, the federal bank, also said that there are signs that economic activity around the world is starting to expand due to the monetary and fiscal policy put in place by international governments, however, this activity has only happened recently and additional policies are still needed to sustain this growth.

In Canada, demand is increasing with higher commodity prices and increased business and consumer confidence, although, the higher Canadian dollar and the automotive industries restructuring is moderating growth. The BoC believes that economic growth will be as follows:

• 2009: -2.3%
• 2010: 3.0%
• 2011: 3.5%

And the country will reach production capacity in the middle of 2011.