Canada's Housing Bubble

April 9, 2010 Paul Vieira Financial Post

The increase of 275 basis points, to 3% by the end of the third quarter of 2011, is bigger than what Mr. Jestin had previously anticipated. His earlier forecast had the central bank target rate climbing by a cumulative 200 points.

A Bloomberg survey of economists anticipate the Bank of Canada rate hitting 1.25% by the end of this year.

The Bank of Canada is set to release its latest interest-rate statement on April 20, at which time it is expected to upgrade its forecast for economic growth – which for the first three months of the year is expected to be 5%-plus on an annualized basis. The central bank had forecast expansion of 3.5%.

Mr. Jestin has penciled in growth of 3.3% in Canada for 2010.

The update also anticipates higher long-term borrowing costs, with the yield on the 10-year U.S. Treasury expected to climb above the 5% mark, as a result of the massive amount of bonds Washington has to issue to finance government operations. Canadian yield are expected to rise in tandem.

"Output growth around the world continues to gain momentum, underpinned by very accommodative monetary and fiscal policies, the gradual re-opening of credit taps, and the strong cyclical upswing in inventory restocking," Mr. Jestin said. "Nevertheless, the renewed upward trend in borrowing costs, emerging fiscal restraint, household deleveraging in many over-indebted countries, restructuring in a number of key industries, and the re-regulation of the financial sector should contribute to a more moderate growth performance in 2011."

In contrast, Avery Shenfeld, chief economist at CIBC World Markets, said in a note this week that he expected the Bank of Canada's benchmark rate to peak at 2.5% next year.