Wednesday, August 26, 2009

Central banks signal low rates here to stay

Paul Vieira, Financial Post, with files from Reuters

Published: Monday, August 24, 2009

OTTAWA -- Despite growing confidence that economic growth is in the offing, monetary policy around the world is likely to remain "ultra-accommodative," perhaps until 2011, as doubt remains as to whether or not the growth expected this quarter is sustainable, analysts say.

That is the view emerging following the weekend gathering of the world's leading central bankers in Jackson Hole, Wyo., highlighted by remarks from Ben Bernanke, U.S. Federal Reserve chairman, who warned of the uncertainties ahead, and Jean-Claude Trichet, president of the European Central Bank, who suggested he is in no rush to reverse emergency stimulus measures.

"The key message from Jackson Hole was ... that monetary policy is likely to remain ultra-accommodative for the foreseeable future - at least for the next several years," said Julian Jessop, chief international economist at Capital Economics of London. "It seems more likely that there will be no increases in interest rates in any of the major economies over the next 12 to 18 months."

Strategists at RBC Capital Markets concurred, adding in a note released Monday: "We continue to believe the economic backdrop will warrant a significant additional period of low rates.

Indeed, even at the Jackson Hole conference, there was not even a suggestion that we should be braced for anything other than that outcome."This outlook applies to Canada as well. Banc of America Securities-Merrill Lynch, as part of global report on monetary policy, said it does not expect the Bank of Canada to begin raising rates until 2011 - well past its pledge to keep the key policy rate, at 0.25%, until June 2010.

Canada has a significant output gap - the difference between potential and real gross domestic product - and the rate at which money is deployed in the economy, or money velocity, has shrunk 15% since late last year even though the central bank has taken its target rate to its lowest possible level, the BofA-Merrill Lynch analysis indicates."To compensate, we think the Bank of Canada will probably need to keep rates lower ... to ensure that money creation remains in the double-digit [growth] territory needed to reinflate the economy and close the output gap," the report says.

This outlook is similar to what economists at Laurentian Bank Securities suggested last week. They said a lack of pricing power for firms, a sizeable amount of excess supply and virtually non-existent upward pressure from labour costs means the bulk of policy tightening would not materialize until 2011.The Bank of Canada signalled in its last economic outlook that it expected economic growth to resume this quarter, marking, technically, the end of a deep but relatively short recession. It expects growth this quarter of 1.3%, 3% in the final three months of 2009, and the latter again in 2010. Further boosting the recovery story was data from Japan, Germany and France that indicated economic growth in the second quarter.But there are growing concerns about the sustainability of this emerging recovery.

In a note published last week, Olivier Blanchard, chief economist of the International Monetary Fund, warned of a difficult recovery that would take years to unfold as elements of the financial system remain dysfunctional. Of particular concern in his outlook was the source of demand once governments phased out fiscal stimuli. The worry is that U.S. business investment and household spending would remain weak, and Asian economies would fail to pick up the slack.

Still, some leading central bankers warn about leaving interest rates too low too long.Masaaki Shirakawa, governor at Bank of Japan, told his peers at Jackson Hole that policymakers must avoid economic bubbles fostered by expectations that interest rates will remain low. "Shirakawa's point about the need to prevent future bubbles is weighing more on minds of central bankers, so maybe they do have to be a little more careful," said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.

Monday, August 24, 2009

Tips for paying your mortgage off faster

While it may seem like a gargantuan task right now, one day you will be mortgage-free. To help that day come a little sooner, abide by some (or all) of the following steps:

1. Make a payment more than once a month.
While it may take a little bit of getting used to, paying weekly or bimonthly rather than once a month can save you thousands in accumulated interest costs and shave years off the life of your mortgage.

2. Pay the five-year fixed rate on your variable rate mortgage.
Historically speaking, variable rates have generally remained significantly lower than their five-year fixed counterparts. By employing a bit of discipline and paying the going five-year fixed rate on your variable rate mortgage, you'll likely be adding a few hundred dollars to your payment every month -- and that's going directly to your principle. Your ability to do this depends on your lenders pre-payment privileges so be sure to check with your lender to see how much you are able to pre-pay on your payments.

3. Stay away from 35-year amortizations.
While they're good to have as a back-up option -- a safety net to use if you lose your job, start a new business or go on maternity leave -- sticking with the 35-year amortization rate throughout the life of your mortgage means, well, you won't be mortgage free for another 35 years. When shopping for a home, make sure you can comfortably afford the 25-year amortization rate, and aim to use the 35-year rate as your emergency option.
If your lender allows this you could choose a 35 year amortization but pay extra every month so you're actually paying the mortgage over 25 years. This way you have the option of a lower payment should money become tight.

4. Take advantage of lump sum payments.
While very few Canadians ever make a lump sum payment on their mortgage, in most cases the option is available. If you receive performance bonuses with your current job, or if you're a commission-based employee that's raked in a little more than expected in the past year, consider placing the surplus towards your mortgage.

5. Shop around at renewal.
From term to term, mortgage rates will change. Make sure you're shopping around for the best rate possible, rather than merely re-signing with your existing lender.

Wednesday, August 12, 2009

Fed's outlook brightens

Jeanne Aversa
Washington — The Associated Press Last updated on Wednesday, Aug. 12, 2009 03:26PM EDT
The Federal Reserve delivered a vote of confidence in the economy Wednesday, saying it would slow the pace of an emergency rescue program as the recession appears to be ending.
The central bank also held a key banking lending rate at a record low near zero and again pledged to keep it there for “an extended period.”
In an upgraded assessment, the Fed said the economic barometers since its last meeting in late June suggest that “economic activity is levelling out.” Conditions in financial markets also “have improved further.”
The Fed said it would gradually slow the pace of its program to buy $300 billion worth of Treasury securities so that it will shut down at the end of October, a month later than previously scheduled. It has bought $253 billion of the securities so far.
The program is aimed at lowering rates on mortgages and other consumer debt, a move to spur Americans to spend more. But its effectiveness has been questioned by some on Wall Street and on Capitol Hill who worry that the program makes it look like the Fed is printing money to pay for Uncle Sam's exploding deficits.
A fairly weak auction of $23-billion in 10-year notes sent a clear signal that investors were waiting to see what the Fed had to say at the before making any big moves. The 10-year auction's bid-to-cover ratio, a measure of demand, was 2.49 per cent, down sharply from 3.28 per cent at a similar auction in July. Indirect bids, an indication of foreign buying, were lower than at recent auctions.
Meanwhile, economists predict the Fed will leave its target range for its banking lending rate between zero and 0.25 per cent through the rest of this year. The rationale: super-low lending will spur Americans to spend more, which would support the economy.
If the Fed holds its key rate steady, that means commercial banks' prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will stay around 3.25 per cent, the lowest in decades.
It was the first Fed meeting since the economy has flashed more definitive signs of turning a corner.
But dangers lurk.
Although consumer spending has stabilized, job losses, sluggish income growth, hits to wealth from tanking home values and still hard to get credit could make Americans cautious in the months ahead, the Fed said.
The Fed expressed confidence that its low rates and other aggressive actions so far will gradually help bolster the economy. Even so, economic activity probably will “remain weak for a time,” the Fed warned.
Against that backdrop, the Fed said inflation is likely to stay “subdued.” Fed policy makers predicted that idle factories and the weak employment market will make it hard for companies to jack up prices.
While unemployment dipped to 9.4 per cent in July, the Fed says it's likely to top 10 per cent this year because companies won't be in a rush to hire.
The Fed didn't make any changes to another program that aims to push down mortgage rates.
In that venture, the Fed is on track to buy $1.25-trillion worth of securities issued by mortgage finance companies Fannie Mae and Freddie Mac by the end of the year. The central bank's recent purchases have totalled about $542.8-billion.
It also didn't offer signs about the fate of another program intended to spark more lending to consumers and businesses at lower rates.
The Term Asset-Backed Securities Loan Facility, which had gotten off to a slow start in March, is slated to shut down at the end of December. Despite the TALF, many people are having trouble getting loans, analysts say. More recently, the program was expanded to provide relief to the commercial real-estate market.
The Fed has been weighing whether it should end some of its revival programs now that signs are growing that the economy is on the mend.
Factory activity is improving. Home sales are starting to pick up, although much of the activity involves people snapping up bargain-priced foreclosed properties. Companies are cutting far fewer workers.
Some financial stresses also are easing, but lending is not flowing normally and financial markets aren't back to full throttle.
Many analysts believe the economy — which logged a mild contraction in the second quarter after a dizzying free-fall in the prior six months — is growing now.