Bank of Canada rate to reach two per cent by year end: RBC

Mortgage Broker News, March 11, 2011

As part of its economic outlook for 2011, RBC projects that the Bank of Canada overnight rate will rise from one per cent to two per cent by year-end.

The gradual pace of rate increases combined with anchored inflation expectations will result in less upward pressure on long-term interest rates, added the Economic Outlook released by RBC Economics.

On the back of solid net exports in the final quarter of 2010, Canada’s economy finished the year on a high note recording stronger than expected gains. The biggest support for the economy came from net exports, which added a full 4.5 percentage points to the quarterly growth rate. Continued consumer spending also played a vital role in driving overall GDP, marking the fastest increase in spending since late 2007.

RBC expects real GDP to increase at 3.2 per cent in 2011, as U.S. demand for Canadian exports increases. Growth in 2012 is forecast to rise by 3.1 per cent.

The report also stated labour market conditions will remain firm in 2011and disposable income is expected to post a 4.1 per cent gain that will provide continued support to consumer spending.

“Consumers’ earlier confidence in taking on increasing amounts of debt was based on a combination of lower interest rates, a strengthening labour market and a 4.6 per cent rise in disposable income,” explained Craig Wright, senior vice-president and chief economist, RBC Wright. “An expected slowing in the housing market, rising interest rates and tightening mortgage lending standards all add up to a levelling out in consumer debt relative to income.”

At the provincial level, RBC forecasts Saskatchewan will lead the country in growth this year. Alberta is expected to return to a top three placing, closely trailing growth in Newfoundland and Labrador. Ontario and Manitoba will hover close to the national average while both Quebec and British Columbia will fall slightly below. Nova Scotia, New Brunswick and Prince Edward Island are still projected to lag behind at the lower end of the scale for 2011.