Canada’s annual inflation rate fell slightly in February, giving the Bank of Canada room to keep interest rates low over the next few months, economists say.

Statistics Canada said Friday its consumer price index edged down one-tenth of a point to 2.2 per cent in February, with rising energy and gas prices keeping inflation just above the Bank of Canada’s ideal two per cent target.

The core inflation rate, which excludes volatile items such as gas and food, fell to 0.9 per cent — its lowest level since the government started keeping records in 1984. Economists had predicted an annual core rate of 1.1 per cent and annual inflation to remain at the January level of 2.3 per cent.

It all means the country’s central bank might take its time when it comes to raising interest rates, said CIBC World Markets economist Emanuella Enenajor.

“These (inflation) numbers certainly make it less likely that a May rate hike could happen, we do have to admit,” she said.

“Such a soft core number suggests there’s less pressure for the Bank of Canada to really start hiking rates aggressively so it gives it a little more leeway.”

She said CIBC is for now sticking with its prediction that Canadians will see rates go above the current one per cent in May and that they will end up at two per cent by the end of the year.

Canada’s economic growth surpassed expectations in the last half of 2010 and the Bank of Canada may want to get ahead of any resulting spike in prices by raising interest rates and cooling lending conditions, she said.

Doug Porter, deputy chief economist at BMO Capital Markets said he believes the central bank is likely to stick with lower rates for the short term.

“Both headline and core inflation have eased since the start of the year, at least partly thanks to the lofty loonie,” he wrote in a note to investors, pointing out that Canada’s core inflation rate is lower than that of the U.S. and rest of the world.

“This is set to reverse next month, as Canada gets with the global program, but the low starting point is very favourable. Suffice it to say that this keeps the pressure well off the Bank of Canada to get back in tightening mode any time soon.”

Enenajor said the March inflation rate will likely depend on oil price movement during the rest of the month.

“However, expect both the annual headline and core rate to move higher in March on a year-on-year basis,” she said.

Prices were higher in February in six of the eight major categories tracked by the agency, but items like women’s clothing, footwear and travel tours cost less than a year earlier.

On a month-to-month basis, consumer goods were 0.3 per cent more expensive last month than in January, mostly due to higher energy and gasoline prices. Canadians paid 10.6 per cent more for energy during the year leading up to February, after posting a nine per cent increase in January.

Gas prices soared 15.7 per cent last month, on top of the already recorded 13 per cent increase in the 12 months leading up to January.

On a regional basis, Nova Scotia remained the province with the highest inflation rate at 3.4 per cent. Many people in that province use oil and other fuel to heat their homes.

Alberta continued to enjoy the most stable prices, with an inflation rate of 1.2 per cent.

Drivers in every province except Manitoba faced double-digit price increases for gasoline on a year-over-year basis. The price at the pumps was up 15.7 per cent from a year earlier.

TORONTO – Recent tragic events in Japan follow a string of global catastrophes that could slow economic recovery in the short term, but should not push either the Canadian or global economies back into recession, according to some of Canada’s top economists.

“Obviously horrible things have happened (in Japan) that will take some of the growth out of the economy for the next two quarters,” said Glen Hodgson, chief economist at the Conference Board of Canada.

“Then people need to rebuild infrastructure, rail and housing and that will actually improve growth in the next four to six quarters.”

Hodgson joined two major banks Thursday in projecting that the crisis at Japan’s Fukushima Dai-ichi nuclear plant and last week’s earthquake and tsunami will conspire with a number of other global events — including uprisings in the Middle East and Europe’s sovereign debt crisis — to decelerate the global economic recovery.

“They will have a negative impact … (but) we’re certainly not returning to recession in any place,” Hodgson said.

G7 countries, including Canada were set to meet in a teleconference Thursday night to discuss the economic impact of the disasters in Japan.

Bank of Montreal (TSX:BMO) economists said in a report that they had trimmed their forecast for global growth by a quarter point to 3.75 per cent as a result of recent events.

“Prior to Japan’s earthquake, we had been calling for global GDP growth this year of four per cent,” they wrote.

“Until we see how the (Japanese) nuclear crisis plays out, it’s next to impossible to properly assess the full economic impact, but a rough guess would be that events in Japan could cut this year’s GDP growth by nearly a percentage point.”

As a result, the bank doesn’t expect an increase in the Bank of Canada’s key overnight lending rate until at least this summer.

However, the effect on the Canadian economy will be minimal and short-lived as Canada stands to benefit from higher oil prices and Japan’s rebuilding process, Paul Taylor, chief investment officer at BMO Harris Private Banking, said during a conference call Thursday.

There will be a short-term impact on the financial sector— where Canadian insurer Manulife (TSX:MFC) has taken a beating due to its exposure in Japan — as well as uranium producers, as governments around the world begins to rethink the use of nuclear energy.

However, many Canadian businesses, including lumber producers and engineering and construction firms, will see an increase in business during the rebuilding phase, he added.

“The Canadian economic impact, we expect to be quite limited,” he said, adding that trade between Canada and Japan doesn’t compare with Canada-U.S. trade.

“For us, it’s only the secondary impact of Japan’s effect on U.S. economic activity that were focused on,” he said.

Meanwhile, his colleague, Jack Ablin, chief investment officer at U.S.-based subsidiary Harris Private Bank, said he was knocking down his U.S. growth forecast by a percentage point because of the crisis in Japan.

Japan’s earthquake and nuclear disasters will likely reduce manufacturing output for several months, potentially creating shortages that could disrupt North American producers, such as automakers, that rely on Japan for parts.

General Motors said Thursday that it was suspending production at its Shreveport assembly plant in Louisiana next week due to a parts shortage resulting from the crisis in Japan, but so far its Canadian plants are operating normally, a spokesman said.

CIBC also cut its growth forecast for the U.S. growth by a tenth of a point, to 2.7 per cent, mostly due to the negative impact of oil price hikes and government spending cutbacks.

Among other things, CIBC senior economist Peter Buchanan noted in a report that surging gasoline prices raise questions about whether U.S. consumer spending can continue its increasingly healthy pace.

However, Buchanan believes that oil would have to reach US$160 a barrel to derail the economic recovery, a scenario he does not see playing out. After plunging in recent days, crude jumped $3.44 to settle at US$101.42 a barrel Thursday on the New York Mercantile Exchange.

“Oil has risen dramatically before, only to crash back to earth, and there are still good reasons why history may repeat itself,” Buchanan said.

Inventories in industrial countries were adequate when the Middle Eastern political pot began bubbling and OPEC, while it likes firm prices, has no interest in recession-inducing ones that crush demand.

Since Canada is one of the world’s top dozen net exporters of oil and oil products, higher crude prices are a modest plus for the economy in the near term.

But beyond four to five quarters, the drag on the economies of its major trading partners means the bad more than cancels the good, and the level of GDP is actually lower than it would otherwise have been.

While Canada is not immune to issues facing the global economy, the report forecasts real GDP growth of four per cent for the country in the first quarter of 2011 and Buchanan expects the Bank of Canada to hike its trend-setting overnight rate as early as May.

OTTAWA – Canada’s economy will register a strong start to 2011 despite the growing risks from crises in Japan and the Middle East, predicts a major Canadian bank.

The TD Bank’s new forecast has the Canadian economy advancing a robust 3.5 per cent in the first half of this year, before slowing slightly in the second half.

For the year, the chartered bank expects the economy will expand by three per cent, half a point more than its previous estimate and 0.6 percentage points higher than the Bank of Canada’s official projection. The 2012 growth estimate remains unchanged at 2.5 per cent.

The bank expects the economy will create about 350,000 new jobs this year, more than last year’s total, with the unemployment rate dropping to 7.5 per cent by year’s end.

The new forecast is not a big surprise — more and more of Canada’s financial institutions have been upgrading their outlooks. The economist consensus given to the Finance Department on Friday in preparation for the March 22 budget has moved to 2.9 per cent from 2.4 per cent in January.

But it is the first major revision since last Friday, when a massive earthquake and tsunami rocked the world’s third largest economy, setting off a chain of events that points to a nuclear catastrophe at Japan’s nuclear plants.

TD chief economist Craig Alexander said the outlook took events in Japan into consideration, but the bank has determined the impact on the Canadian and global economies will be minor.

While there might be supply-chain disruptions in some sectors, particularly the auto sector, it notes that Japan represents on two per cent of Canadian exports.

“You don’t want to minimize what’s happening in Japan and if the worst fears come true then Japan’s economy is going to do a whole lot worse,” said Alexander.

“But the risks are risks, they aren’t the most likely outcome. It’s still the case that the economic climate in the world is quite good. For Canada, we’re going to have moderate growth, low inflation, solid profit growth, low albeit rising interest rates … this is actually a pretty benign economic environment.”

As devastating as the disaster in Japan is in human terms, the macro-economic impacts are small since global supply chains will find substitute sources for output to replace the affected region, Alexander explained.

Longer term, Japan’s need for materials to help in the reconstruction could help the Canadian economy, although the overall impact will also be small.

Alexander said the strengths of the Canadian economy going forward are business investment, which he expects to keep growing, exports and consumer spending.

Government restraint, higher interest rates from the Bank of Canada moving to a tighter monetary posture, and housing will be key drags.

While it predates the Japanese natural disaster, Statistics Canada released fresh data Wednesday showing that Canada’s still depressed manufacturing sector had a banner January, with activity picking up by a massive 5.5 per cent in volume terms.

The data adds credence to December’s trade surge, which even after a downward revision showed exports rising about eight per cent.

“Without a doubt, the manufacturing data shows that underlying economic growth is improving,” said David Madani of Capital Economics, although he wondered if the momentum can be sustained.

TD’s sunnier outlook, as with other major institutions that have revised upwards, stems from the strong 3.3 per cent growth recorded in the fourth quarter, a more optimistic outlook for Canada’s biggest trading partner — the United States — and higher demand for commodities.

TD suggested that growth will be particularly prominent in the Prairies and Newfoundland and Labrador, helped by stronger financial positions from the governments in those regions, and strength in commodity prices.

But even manufacturing-heavy Ontario saw its growth profile rise from 2.4 per cent to 2.9 per cent in the TD outlook.

If you’re thinking of selling your house to make a little money before rising interest rates squeeze the real estate market, there’s good news and bad news.

The good news is you’re almost certainly making money because home prices in Canada have been rising for the past few decades, particularly in the greater Vancouver area.

The bad news is: It’s not as much money as you’d like.

We recently sold our income property, and I was aghast at some of the costs associated with closing. Here are some of the biggies to keep in mind, if you’re going that route:

– Paying the agent. Your real estate agent and the buyer’s agent share 3 per cent to 7 per cent of the selling price. That comes out of your pocket. You can haggle on the commission, though. You also have to pay sales taxes on the commission. If you decide to sell your house without an agent, you get to keep more money, but it does mean that you have to do the legwork yourself, while fending off persistent calls from agents who are waiting for you to throw in the towel.

– Paying the lawyer. You’re looking at least $500 in legal fees. There is also the cost of disbursements, such as registration fees and related expenses, which can add up to a few hundred more. And you pay sales taxes on the total, which varies depending on which part of Canada you live in.

– Paying the bank. Unless your house is fully paid off, you will have to pay a fee of as much as $270 to discharge your mortgage. (Major banks’ discharge fees are listed here.) If you have a closed mortgage, your bank may also ding you for prepayment charges — equalling several months’ worth of mortgage payments, depending on the number of years outstanding and the interest rate. If you are buying another property, you may be able to transfer your mortgage.

– Paying utilities and property taxes. You have to pay your share until the deal closes. For example, if it closes in the middle of the month, you have to pay for the first half.

– Paying the government. If it’s your primary residence, you’re in luck and don’t have to pay capital gains tax. If it’s an income property, however, you have to pay tax at your marginal income tax rate on half the gains.

Ontario’s real GDP is forecast to grow by 3.1 per cent in 2011, marking the province’s best performance since 2002, according to the latest Provincial Economic Outlook report released today by RBC Economics. The even better news: Ontario’s economy will enter the expansion phase this year, as it finally moves beyond recovery from its 2008-2009 recession losses.

RBC notes that a number of positive economic indications have emerged in the past many months. The provincial labour market has shown impressive gains since late summer-early fall 2010; consumer retail sales grew at their fastest rate in years in the fourth quarter; and non-residential investment maintained its second fastest rate of increase since early 2006. Furthermore, merchandise exports recently regained ground and motor vehicle production surged in January, suggesting a stronger advance may be evident early in 2011.

“The Ontario economy has picked up its game lately. Generally, conditions are expected to continue to improve this year, enabling the province to complete its recovery and start to expand again,” said Craig Wright, senior vice-president and chief economist, RBC. “This next stage of Ontario’s economic cycle will increasingly rest on strengthening demand from the United States, which we forecast will grow faster in 2011 (3.4 per cent) than it did in 2010 (2.8 per cent).”

The RBC report notes, however, that the anticipated leveling off of capital investment in various public infrastructure projects will be a restraining factor to provincial growth this year.

“Public capital spending will contribute significantly less to growth this year than it did in 2010; yet further strong increases in transportation-related outlays, including public transit, will maintain a high level of activity overall,” explained Wright. 

RBC forecasts Ontario’s economy to grow again by 3.1 per cent in 2012 as stronger external trade performance lends further support to the expansion.

The RBC Economics Provincial Outlook assesses the provinces according to economic growth, employment growth, unemployment rates, retail sales, housing starts and consumer price indexes. 

Canadian household debt continued to grow at a faster rate than assets in the fourth quarter of 2010, Statistics Canada reported Monday.

The average debt-to-personal disposable income ratio edged down to 146.8 per cent in quarter, but only because a 1.8 per cent gain in average personal disposable income outpaced a gain in credit market debt.

The ratio of household debt to assets remained high, by historical standards, and homeowner’s equity, or market value minus debt, continued a three year slide, reaching the slowest level since 2001.

But the rate at which Canadians piled on debt slowed, with nonmortgage credit, such as credit cards, slowing the most, at 5.8 per cent from a year ago. That was its slowest growth rate since the mid-1990s.

Overall household liabilities grew by 6.5 per cent from the same period a year ago levels. That was its slowest annual growth rate since the fourth quarter of 2002.

The value of financial assets, including investments in stocks and bonds, grew by six per cent from the same period a year earlier. Real estate assets rose 6.2 per cent from a year ago levels.

Household net worth, or assets minus debt, grew by 2.2 per cent in the last three months of the year, following a three per cent rise in the previous quarter. Household net worth per capita increased from $178,200 in the third quarter to $181,700 in the fourth quarter.

A key measure of families’ abilities to cope with their debt, the ratio of how much disposable income went towards paying just the interest on debt, was unchanged at 7.3 per cent in the quarter.

The rate of growth in net worth, after rebounding from the recession, has stayed in a range of between five and six per cent. That compares with a pace of between nine to 10 per cent in the five years leading up to the recession.

“The debt-service ratio remains muted only because interest rates are still ultra low,” TD economist Diana Petramala warned in a commentary.

“Once interest rates start to rise over the latter half of 2011, the debt-service ratio is expected to climb substantially.”

“As households are expected to continue to accumulate debt at a faster pace than asset and income growth, the key measure of indebtedness will continue to deteriorate,” Petramala said.

“As such, the level of household debt is expected to act as a headwind on economic growth through the second half of 2011, and 2012, as rising interest rates encourage households to rein in their borrowing and increase savings.”

The StatsCan report also showed the net debt of the federal, provincial and territorial governments increased by $19 billion in the fourth quarter and the ratio of net debt to gross domestic product stood at 45.1 per cent.

That continued an upward trend since the third quarter of 2008 when it stood at 35.4 per cent.

Measuring all debt — government, business and family — national net worth edged up 0.3 per cent to $6.3 trillion in the fourth quarter, the slowest quarterly growth of the year.

On a per capita basis, national net worth grew to $184,200 in the fourth quarter, up from $183,900 in the previous quarter.

OTTAWA – The Canadian economy disappointed in February, creating a smaller than expected 15,100 new jobs that included an outright decline in full-time work.

The tiny pick-up overall, all part time jobs, was below the consensus expectation for as many as 25,000 new jobs, but large enough to keep the unemployment rate at 7.8 per cent..

Analysts looking at the national situation saw the jobs picture as a glass half empty.

CIBC economist Emanuella Enenajor characterized the news as “disappointing, but not alarming.”

“Although the magnitude and quality of job creation this month fell short of expectations, the three-month trend still suggests that the health of the jobs market is improving, with an average of 38,000 jobs created over that period.”

But Scotiabank’s Derek Holt noted the devil in the details. Part-time employment accounted for all the gains and more, increasing by 38,900 during the month. The private sector shed 20,000 jobs, and the number of employees in Canada, as opposed to those self-employed, declined by 10,400.

As well, hours worked fell 0.25 per cent, which will detract for gross domestic product growth this quarter.

“It’s not that 15,000 is cause to turn up one’s nose … (but) the details are worse than the headline,” Holt noted. “This comes on the heels of yesterday’s sharp erosion in January’s real trade deficit that dings month GDP and will cause downward revisions to December’s GDP.”

He said the Bank of Canada will look on this as a dovish report and will see no urgency to start hiking interest rates soon.

More had been expected of the economy during the month, especially after the strong 69,200 gain in January and signs of strength in other economic indicators, including the gathering momentum in the U.S. that is normally a good indicator for Canada.

Instead, the economy put in the worst jobs performance in three months, with full-time employment falling by 23,800. The majority of the losses came in the business, building and other support services group.

Statistics Canada noted that of the 322,000 jobs created over the past 12 months, more have been part-time jobs than full-time.

Last week, the U.S. government reported the country added 222,000 private sector jobs, the first time in months the U.S. has outperformed Canada on employment gains.

The lacklustre report came as Finance Minister Jim Flaherty was to meet with private sector economists for the last time before the March 22 budget.

The analysts were expected to upgrade their earlier call for economic performance this year by about half-a-point from the 2.4 per cent January consensus, although the jobs data might persuade Flaherty to insert a prudence factor in the forecast, as he did last year.

However, the Royal Bank made clear it was not backing down from it’s for a 3.2 per cent advance and stayed firm on the chart-topping prediction with a new report Friday.

“In part, the economy’s sustained strength stems from our view that U.S. demand for Canadian exports will firm this year while import growth eases,” the RBC said.

“Key assumptions in this forecast are that the rebound in motor vehicle demand that is currently underway will continue and that demand for commodity-related products will remain robust.”

In February, employment gains were concentrated in the health care and social assistance group, which added 18,000 jobs, and accommodation and food services, which saw a pick-up of 15,000.

Meanwhile, the business, building and other support services category shed 35,000 jobs in February, while employment in public administration fell by 14,000.

Regionally, Alberta was the only province in Canada with a notable employment gain of about 14,000, while Ontario and Saskatchewan experienced small declines.

The Bank of Canada has now kept its official interest unchanged at 1 per cent for the fourth meeting.

Those with floating-rate debts will no doubt be relieved; however, economists were looking for a signal from Mr. Carney and crew that improving economic conditions were paving the way for a return to rate hikes sometime soon.

Had this week’s policy meeting taken place a few weeks ago, it’s likely we would have received that signal. Indeed, most indicators have pointed to stronger-than-expected activity in Canada and the U.S., while emerging economies have maintained a torrid pace of growth.

That would have been before the recent developments in Egypt, Tunisia, Yemen and now Libya. The grassroots uprising against incumbent regimes might be welcome from a democratic ideal perspective, but it has created a rift in energy markets.

Crude awakening

After dipping briefly below $85/barrel in February, the price of crude oil has now broken above $100 for the first time since October 2008, testing $103.40 last week — the 61.8 per cent retracement mark from the July-December 2008 collapse.

A close above this level will increase the odds of a move to $120 (recall that $147.27 was the intraday high from July 2008). And if you thought the recent spike in pump prices was unnerving, gasoline futures have already crossed above the 61.8 per cent retracement level and are trading above three bucks (US) a gallon.

In July 2008, futures broke above $3.70/gallon. Even if prices simply hold near current levels, average pump prices in Canada could easily gravitate towards $1.30/litre. That’s not good news for those planning to drive to their March break vacation spots, or for those returning snowbirds.

One might suspect the Bank of Canada would see the boost to inflation, that will come from commodities like oil and gasoline, as something that needs to be worked against through tighter monetary policy, but that’s old school.

These commodities, like food (which is also seeing some inflation strain), are essentials and represent a significant share of our non-discretionary spending. Unless incomes rise by the same amount as the cost of these essentials, everything else being different, there will be less to spend on discretionary goods and services. In other words, real consumption growth in Canada could slow.

Not so fast

How much of a slowdown we experience in consumer spending (and let’s throw in housing expenditures too), depends greatly on that above-mentioned phrase “all other things being equal.”

If employment grows at a decent clip and wages go with it, then the affect on spending will be less pronounced. As of the end of 2010, average weekly earnings in Canada were up 4.5 per cent over the same period a year ago, which was the fourth-best growth rate in earnings since records started in the early 1990s.

To put this in perspective, when crude oil was climbing towards $150 back in the summer of 2008, weekly earnings growth was heading in the opposite direction.

There were other headwinds facing Canada back in 2008, including the cost of borrowing. When oil reached its peak, the 5-year conventional mortgage rate in Canada was above 7 per cent. Today, it sits near 5.5 per cent. The 1-year rate was also close to 7 per cent (yes, we had a very flat yield curve before the walls came tumbling in), compared to 3.5 per cent today.

Now, I’m not suggesting that we’re going to stay in interest rate limbo forever, but the Canadian consumer is in better shape to handle higher pump prices today than back two years ago.

How long can they sit on the fence?

What the Bank of Canada has to be careful of here is the oil price shocks emanating from across the pond turn out to be temporary and there is no slowdown in consumption growth. Bank economists are already looking towards 2012 as the likely period where excess capacity in Canada’s economy disappears and inflation returns to target (using the core inflation measure).

It is easy, however, to accelerate that trip back to zero excess and just as easy to push the economy into a situation of excess demand.

Coming back to the Bank’s decision this week, it may have been surprising to see it lean against speculation of near-term tightening. But, it would be a mistake to assume the Bank can’t and won’t pull the trigger on rates before the summer.

There are two policy meetings left this half (April and May), so if Mr. Carney and crew wake up and realize there is too much potential inflation risk in leaving rates unchanged, they will need the April meeting to deliver the guidance towards a May rate hike — something economists thought was going to happen this week.

And if energy price shocks don’t intensify and the Bank fails to deliver such guidance, don’t be surprised if the bond market creates the guidance for them.

OTTAWA — The improving economic backdrop has strengthened some economists’ view that the Bank of Canada will begin raising its benchmark rate in the  – either in April or May – or at the very least in July, once the U.S. Federal Reserve is scheduled to end its US$600-billion asset purchase plan.

Not so the Bank of Nova Scotia. It is among the few research houses on Bay Street that believe the Bank of Canada, led by governor Mark Carney, will wait much longer – to October to be more precise. (Meanwhile, analysts at Capital Economics have reiterated their view the central bank remains on hold for all of 2010.) The main culprit: A weak U.S. dollar which could drive the loonie to US$1.08 by the end of the year.

Scotiabank economists Derek Holt and Gorica Djeric offered a detailed explanation of its view in a note to clients. Here is a summary of Scotiabank’s arguments:

• THE GREENBACK WILL KEEP SLIDING

Scotiabank is just plain bearish on the U.S. currency, as the Federal Reserve continues to pump cash into the system and keep its benchmark rate near zero. But the bank also believes there is a chance the White House further extends stimulus measures agreed upon late last year as opposed to allowing them expire – likely earning a rebuke from bond raters and fixed-income investors as Washington’s fiscal status would deteriorate further. That, in turn, would make the U.S. dollar even less favourable and likely adds to the loonie’s strength.

That could drive the loonie to as high as US1.08¢ by the end of 2011 — a full 12 cents above the most dovish view on the loonie, Scotia admits.

“This type of CAD strength imposes net tightening on the Canadian economy that we believe will do the Bank of Canada’s tightening for them. It is difficult to envision further Bank of Canada tightening when our expectation is that Canadian dollar will be lit up apart from what the Bank of Canada does.”

• GLOBAL UNCERTAINTY WILL CONTINUE

Turmoil in North Africa and the Middle East, and the impact that is having on energy prices, justifies the central bank keeping its powder dry for now. “No one has a clue as to how various geopolitical developments … will fully unfold,” Scotiabank said.

Also lurking in the background is Europe’s sovereign debt worries, and what policy makers will eventually agree to at a summit late this month.

• ECONOMIC SLACK REMAINS WIDE

Despite the better-than-expected fourth-quarter growth data, it likely didn’t have much of an impact on the country’s output gap that according to the last Bank of Canada estimate stood at 1.9% of the economy, Scotiabank said. It added it foresees risks to demand growth from government spending cuts, high commodity prices and new mortgage rules.

Furthermore, recent historical evidence would suggest there is a weak link between a narrowing output gap and inflationary pressure, especially since the Bank of Canada adopted an inflation-targeting regime about 20 years ago.

• TIGHTENING ALREADY UNDERWAY

There are developments underway which have the same impact as a rate hike, from a higher Canadian dollar; tougher mortgage financing rules which begin to take effect this month; the withdrawal of government stimulus; and, eventually, higher bond yields which will translate into higher rates on consumer loans.

• DOVISH FED

Fed chairman Ben Bernanke continues to signal a cautious, dovish approach, with expectations rate hikes begin sometime next year. Raising rates in Canada now would just push an already strong loonie higher.

• INFLATION TARGETING REGIME

It is still not clear what the Bank of Canada’s inflation-targeting regime will look like once it is renewed at the end of the year. “Therefore, it’s not clear to us if the Bank of Canada hikes the minute its operational core target gets to 2% in this cycle or is expected to do so,” Scotiabank said.

• FEDERAL & PROVINCIAL ELECTIONS

It remains unclear about whether the federal parties go on an election campaign this year once the federal budget is tabled on March 22. Still, Scotiabank said the central bank has raised rates only once during an election campaign in the last 20 years – in 2006, when the strong economy justified a hike – and will likely show caution again. Compounding matters are a series of provincial elections due in 2011, including Ontario where incumbent Premier Dalton McGuinty has repeatedly voiced concern about rate hikes and the upward push it provides to the Canadian dollar.

TORONTO – Canadian homeowners are much more confident than government officials and economists about their ability to pay off mortgages, even if the market takes a turn for the worse, according to a survey released Wednesday.

The Royal Bank’s annual outlook suggests 85 per cent of respondents think they are doing a good job paying off their loan obligations, and 73 per cent think they are well positioned even if the housing market were to drop.

“The reason that stood out to me is because of all the commentary we’ve all been hearing about Canadians being overextended, all of those various concerns bubbling around,” said Marcia Moffat, RBC head of home equity financing.

The findings contrast with a slew of statistics and warnings from top economists — including Bank of Canada governor Mark Carney — that Canadians are getting in over their heads and may find themselves in difficulty when interest rates rise.

Statistics Canada’s most recent report showed that the debt-to-disposable income ratio of Canadians hit a record 148 per cent in the third quarter, even beating out Americans for indebtedness. Put another way, the figure means Canadians owe $1.48 for every dollar they earn.

But the Royal Bank survey, conducted in January, could also be a sign that Canadians are taking heed after more than a year of warnings issued by the Bank of Canada and the federal government about debt exposure.

“There has been a lot in the media around … (those) concerns for at least the last year and maybe Canadians have been listening, seeking out advice, and ensuring that they’re in a strong financial position,” Moffat said.

“If you’ve got a concern about something transpiring, you may try to get ahead of it to put yourself in a better financial position.”

Canadians’ growing optimism about their debt situations could stem largely from increased job stability and rising incomes, which are providing a better backdrop to pay down debt, Moffat added.

But the government is less assured.

Its third round of tightening mortgage rules in as many years is set to take effect later this month.

New measures introduced by Finance Minister Jim Flaherty to rein in borrowing will take effect March 18. The changes include reducing the amortization period on government-insured mortgages from 35 to 30 years, limiting the size of home-equity loans and removing government insurance on lines of credit secured on homes.

Interest rates are widely expected to rise in the second half of this year, driving up the borrowing costs for variable mortgages and other loans linked to bank’s prime borrowing rates.

Still, 90 per cent of respondents in the Royal Bank survey said they were confident about real estate as an investment and a large majority still thought it was a good time to buy.

Interest in purchasing a new home over the next two years has fallen, but only slightly. At 29 per cent, the number is considered strong and is still better higher than it was 2006.

However, fewer respondents than in last year’s survey said it was better to buy now rather than wait, suggesting that buyers aren’t feeling the same sense of urgency to get into the market.

Buyers rushed into the market in the opening months of last year to beat a combination of rising interest rates, new mortgage rules and the HST in two provinces.

“Last year’s survey showed that people were looking to buy ahead of rising costs,” said Moffat.

“This year marks a return to more normal levels of purchase intentions and recent housing data reflects this move to a more balanced market.”

Nearly 70 per cent of homeowners said the value of their homes has increased in the last two years.

Meanwhile, a Statistics Canada report also released Wednesday suggested that prices for new houses continued to rise at the beginning of this year along with resale home prices.

The federal agency’s new home price index rose 0.2 per cent in January from the level in December.