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That time is nearly upon us again 07/2011

That time is nearly upon as again, when borrowers and economists alike will be turning their focus towards Mark Carney and the Bank of Canada to see whether or not interest rates will push up this time around- or if they will continue their relatively long holding pattern.

While a change to interest rates is always impacting, there is seemingly more at stake this time around.  Inflation is extremely high. In fact in the last Statistics Canada report, consumer prices and inflation had reached an eight-year high, suggesting on the one hand that a rate hike would be yanked off the table, no question.

On the other hand, recent jobs data suggests that employment growth is steady, and that the economy is robust and sustainable- and ready to move to the next level.

Throw into the mix a bevy of reports and surveys in the last few weeks predicting Real Estate Market slowdowns, and bank forecasts for rate hikes (most suggest the fall), these economic tea leaves are truly scattered , and it is really anyone’s guess what is going to happen this time.

And like all good reality shows, Tuesday’s interest rate announcement is going to be the financial equivalent of the “big reveal” to do justice to the dramatic tension that has been escalating in advance of this directive from the BOC. talked to members of our community to try to gauge what the feeling is this time around.

Rod Thompson, Broker, points to global situations for the answers as to what will happen here at home:  “With Europe and theUnited Statesabout to max out their last credit card we have to wonder what that will do toCanada's economy and our real estate market, and as the Bank of Canada ponders raising interest rates.”

“I suspect they will hold off raising these rates until theUnited Statesdetermines how they are going to handle their debt ceiling. For sellers however, it means even more diligence and because we don't have a crystal ball it's important that we as REALTORS provide balanced advice to sellers and ensure they are aware of all the risk and opportunity these global challenges might bring.”

Karen Blomquist, Mortgage Broker, Mortgage Intelligence expects to see some activity later on this year, and thinks that the currently high level of inflation may be the driver.”The major economists have been suggesting a rate increase for July since last September however, I believe they will keep the rates stable for the announcement next week and perhaps raise closer to the end of the year.”

She points to the Bank of Canada themselves for this reasoning: “Based on the current discount from prime, these forecasts suggest 5-year variable rates in the 3.70% range by year-end 2012. This is just a little higher than today’s best 5-year fixed rates of 3.79%.”

“Why? It is important to keep inflation low to stimulate the economy.  Here are some reasons from the Bank of Canada: Uncertainty about where prices of goods and services will be in the future makes it more difficult for people to make sound economic decisions. That uncertainty is magnified when prices are rising, since in these circumstances inflation is seldom stable and predictable. High inflation encourages speculative investments at the expense of more productive investments. It can also create the illusion of temporary financial well-being while masking fundamental economic problems.”

Blomquist also talks other negative effects of high inflation, like hardship for those on a fixed income, and restraint for consumers and businesses in making long term plans.

While the answer is not clear as to what direction interest rates are going to go on Tuesday, there is one thing that is certain.  This is as much about balance as anything else, and the stakes are high this time around.

Watch for the announcement, this coming Tuesday, July 19, 2011.

Courtesy Propertywire Canada

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