Central bank says strong housing market helping economic recovery

The worst is over and the nation is on the road to recovery, according to the Bank of Canada. 

The central bank said it expects Canada's economy will contract 2.3 per cent this year, which is significantly better than the forecast it issued in April, which called for a three per cent decline. The forecast also calls for growth of three per cent in 2010, up from 2.5 per cent in April.

The bank cited the recent strength in domestic demand, the result of  "a bringing forward of household expenditures," as the main reason for the rosier projection.

"The bank has acknowledged that pent-up demand from late last year and earlier this year, combined with low mortgage rates, has resulted in a stronger than expected recovery in the housing market," said CREA chief economist Gregory Klump. "The strength in the housing sector was cited as the reason for the upward revision to the economic forecast, outweighing the moderating effect of a high Canadian dollar."

There might still be some fragility in the economy, so the Bank of Canada held its benchmark overnight lending rate steady at 0.25 per cent. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, remains at 0.5 per cent.

Domestic demand is being spurred by stimulative monetary and fiscal policies, improved financial conditions, firmer commodity prices, and a rebound in consumer and business confidence. 

"However," the bank said, "the higher Canadian dollar, as well as ongoing restructuring in key industrial sectors, is significantly moderating the pace of overall growth." 

The bank had warned at its previous meeting in June that the persistence of a high Canadian dollar would be the main downside risk to growth.

The bank noted that many countries are now seeing economic activity begin to expand in response to monetary and fiscal policy measures, but went on to call the recovery "nascent."

The bank said the importance of keeping the stimulus in place is an "effective and resolute policy implementation (that) remains critical to sustained global growth."

The bank indicated that the  inflation outlook is still unfolding as predicted in its April Monetary Policy Report. At that time, the bank forecast that inflation would climb back to the two per cent midpoint of its target range between one and three per cent in the third quarter of 2011.

The bank also maintained its pledge to hold interest rates at current levels until the end of the second quarter of 2010, conditional on its inflation outlook.

In April, and again in June, the bank assessed the overall risks to its inflation projection as tilted slightly to the downside. It reiterated this assessment in its interest rate announcement on July 21.

The bank's Monetary Policy Report published on April 23 included information about additional monetary policy tools it may use to further inject liquidity into the financial system in its ongoing attack against the continuing credit crunch. 

In its statement, the bank again said that it "retains considerable flexibility in the conduct of monetary policy at low interest rates." 

As of July 21, the advertised five-year conventional mortgage rate stood at 5.85 per cent. This is down 1.3 per cent from one year earlier, but has risen 0.4 per cent from where it stood when the bank made its previous interest rate announcement on June 4.

Improving credit market conditions have enabled lenders to reintroduce discounts off posted mortgage interest rates. Discounts of up to a percentage point can be negotiated, depending on lender-client relationship.

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