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Inflation rate drops in February and rate hikes pulled back.

It may seem hard to believe  but Canada’s core inflation rate is down in February to lowest level since 1984 as reported by CBC.  It’s now 0.90%.

Filling up my car at the gas pumps or buying groceries is certainly costing me more… So how can the inflation rate be lower be lower?

The Core inflation rate strips away food and energy costs resulting in a lower rate of inflation.

The Bank of Canada has a Target inflation rate of 2%.  The Target range is 1% to 3%.  When you combine a high Canadian $dollar that is at par with the $US dollar and this low inflation rate, the Bank of Canada less likely to raise the Target Rate….for now.

Here are a few forecasts…  Citigroup says a rate hike will not take place in April but instead, July.  And retired RBC Chief Economist, Patricia Croft says to watch the Bank of Canada 2 year bond yields for an indication of where the market thinks rates are headed.   The yields have dropped from 1.90% to 1.68%.    She says the market thinks rates won’t go up til October and only by 35bps.  But she thinks we should be ready for summer rate hikes.  The next few inflation reports will play a big part in the Bank of Canada’s future decisions.

I tend to agree with both forecasts… Summer rate hikes are  likely…. but I’m not sure how high and how quickly these rate hikes will happen.   We’ll be watching and reporting.

Inflation rises to highest level in 2 years…but don’t panic

Latest figures show inflation jumped 2.4% in October according to Statistics Canada… compared with 1.9% in September.    The Bank of Canada aims for an inflation rate of between 1% and 3%.    Anything over 2% can trigger the Bank of Canada to take action… Usually, a hike in the Bank of Canada Rate, which affects Variable Rate Mortgages..

However, it’s no reason to panic.  A one month inflation spike probably isn’t enough for the Bank of Canada (BOC) to take drastic action.  It’s probably gonna take consecutive months of higher inflation or other events before the BOC raise rates again.  Most experts believe the Bank of Canada will not make any changes til next year.

Throw in some Global issues like Ireland’s’ debt and the Korean conflict heating up and you get uncertainty… Uncertainty means rates should stay low for some time…

Lower inflation figures mean less pressure to raise rates…

Latest figures show inflation is not a problem…. The latest 12 month figures show inflation running at about 1.7% which is within  the Bank of Canada’s 2% target rate….

Inflation is one of the biggest factors that affects the Bank of Canada’s key rate (the rate that affects Bank’s Prime rate)…..this is good news for Canadian borrowers as there has been a large amount of media coverage regarding the much-anticipated interest rates hikes…

Oh, and by the way… the Bank Prime rate still 2.25% (an all time low)…  Why not just enjoy the low rates and not worry about what might happen in a few years?

Mixed views on inflation reports

Here’s a great article that explains there is no reason to panic…   This week saw the much expected hike in mortgage rates… Bond market is up around 0.30% but the Banks felt they needed to increase the rates by 0.60%….

Hmmmm…didn’t the Banks just announce some HUGE discounted rates a week or two ago?   Talk about a strategic PR move…. Well, that didn’t last long…they have all bumped up the Posted rates…

With the Canadian $dollar just about equal with the $U.S. dollar, there is a little less pressure for the Bank of Canada to raise the overnight rate as aggressively as once thought….we can still expect increases of 0.25% to 0.75% over the next 6 to 12 months but remember that we are well below the 10 yr average of 5.177 and well below the 25 year average of 6.92%....Historically, if the $CAD rises, then the Bank of Canada is less likely to raise rates…

3 main factors to watch that will affect the Bank of Canada Rate…. Inflation, unemployment and the $CAD.    Oh, and by the way, here are the 8 preset dates when the Bank of Canada sets the overnight rate.

Tuesday, 19 January 2010
Tuesday, 2 March 2010
Tuesday, 20 April 2010
Tuesday, 1 June 2010
Tuesday, 20 July 2010
Wednesday, 8 September 2010
Tuesday, 19 October 2010
Tuesday, 7 December 2010

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