Inflation falls to lowest rate in 14 years

Canada's annual rate of inflation fell more than expected to the lowest level in 14 years in April as the economic downturn continued to push consumer prices lower.

Statistics Canada said Wednesday its consumer price index declined to 0.4% during the month from 1.2% in March, while the core rate, which strips out volatile items such as food and energy, and is a key factor in setting the Bank of Canada's monetary policy, eased to 1.8% from 2%.

"While upward pressure on the consumer price index came primarily from food, the slowdown was due mainly to price declines for energy and reduced upward pressure from non-energy shelter components," the federal agency said.

"Excluding food, the CPI fell 1.1% in the 12 months to April. Excluding energy, the CPI rose 2.4% over the same period."

Most economists had forecast an annual inflation rate of 0.6% for April and a core rate of 1.8%, well below the Bank of Canada's target rate of 2%.

Statistics Canada said food prices rose 7.1% in April from a year earlier, down slightly from the annual rate of 7.9% rise in March.

The biggest food-price increases were for fresh vegetables, up 26%, fresh fruit, 16.8%, cereal products, 9.6%, and beef and chicken, both up 9%.

Shelter costs rose by an annual 0.2% in April from 2.1% the previous month.

"The slower pace of increase in shelter costs was due primarily to a drop in prices for natural gas and to slowdowns in mortgage interest costs and electricity prices."

Douglas Porter, deputy chief economists at BMO Capital Markets, said "inflation is now in full retreat ... even with the recent backup in gasoline prices."

"While underlying price trends are holding firmer, they also look to wane notably, especially now that the fever in grocery prices has finally broken," he said.

Last month, the Bank of Canada cut its trendsetting interest rate to a record low of 0.25% and said it would keep it at that level through the second quarter of next year in an effort to spur business and consumer spending in the face of a deepening recession.

The Canadian economy contracted by 3.4% in the fourth quarter of 2008 and the central bank estimates gross domestic product shrank another 7.3% in the first three months of this year.

2009 - Housing starts likely to fall

Canadian housing starts are expected to continue to decline in 2009 as a result of the economic recession before rebounding in 2010, Canada Mortgage and Housing Corp said in a forecast on Tuesday.

The government agency sees housing starts declining this year to 141,900 units from 211,056 last year. It predicts housing starts will rise again next year but still remain below the 2008 level at 150,300 units.

"The decline in housing starts in 2009 can be attributed to several factors, including the current economic climate, increased competition from the existing home market, and the impact of strong house price growth between 2002 and 2007," said Bob Dugan, chief economist for CMHC.

Sales of existing homes are expected to decline to 357,800 units in 2009 from 433,990 in 2008, but increase to 386,100 units in 2010. The average price is expected to decrease to C$283,100 ($244,000) in 2009 and to stabilize in 2010.

Housing starts fell 19.9 percent in the month of April, resuming a downward trend that began in 2008 despite a surprise upturn in March.

Housing activity has softened in Canada, though the sector has not experienced the same sort of plunge that has been seen in the United States. A sharp economic contraction and heavy job losses will continue to pressure the housing market throughout this year, analysts have said.

CMHC said earlier this month that new home construction in Canada was now at a "more sustainable level" after having been exceptionally strong over the previous seven years, exceeding 200,000 units per year.

In the United States, housings starts and permits unexpectedly fell 12.8 percent to record lows in April, a government report showed on Tuesday, denting hopes that stability in the housing market was imminent.

Rates Fall Down

When interest rates are low – particularly now with the Bank of Canada benchmark rate pegged at an historic low of .25 basis points – many think they should refinance their mortgage. This isn't surprising, since a home is the largest purchase most people ever make, with borrowed money in most cases.

This may or may not be a good strategy.

Whether you should refinance your mortgage in a period of low interest rates depends on how much it will cost you to break your existing mortgage compared to how much you will save in interest payments.

If you break an existing mortgage, you will have to pay the greater of three months' interest or the interest rate differential (IRD).

An IRD is a penalty for early prepayment of all or part of a mortgage outside of its normal prepayment terms. Usually, this is calculated as the difference between the existing rate and the rate for the term remaining, multiplied by the principal outstanding and the balance of the term.

For example, if you had a $100,000 mortgage at a 9 per cent interest rate with 24 months remaining and wanted to renegotiate your mortgage at 6.5 per cent for 24 months, your IRD would be $5,000 ($100,000 x 2.5% = $2,500 x 2 years = $5,000).

It may only make sense to refinance your mortgage if the interest rate savings over the remaining life of your mortgage exceeded the value of the IRD.

"The refinancing decision depends on the cost of breaking the mortgage versus how much you save," said Patricia Lovett-Reid, senior vice-president at TD Waterhouse. "You may find you should just stay where you are."

Another strategy is to take a variable rate mortgage. If interest rates go down and you keep your mortgage payments the same, you will be paying off more of your principal with each payment and will pay down your mortgage faster.

Debt is a destroyer of wealth in good times and bad and eliminating it is a good strategy.

Borrowing to invest when interest rates are low is another strategy. This is called leveraging.

Leveraging has a tax advantage because you can write off the interest on the money you borrow to invest.

If your investments perform well and earn a return high enough to make a profit, leveraging has great appeal.

But there is some risk if your investments go down. Just as your gains are magnified with leveraging, so are your losses.

"Investors should use leveraging prudently as part of an overall balanced financial plan," said Lovett-Reid.

Low interest rates can affect your investment portfolio as well.

Some stocks are more sensitive to interest rates than others.

Lower interest rates make companies with high debt loads – such as utilities – more attractive, as well as automobile manufacturers and real estate companies, whose products become cheaper for consumers to buy when rates are low.

Low rates also are affecting fixed income securities. As such, Lovett-Reid said investors after higher returns should consider investment grade corporate bonds, which are yielding around 4.50 per cent for a three-year maturity.

ING Canada could be spun off or sold

ING Bank of Canada could be spun off or sold as its European parent seeks to raise cash after being bailed out by the Dutch government, according to people familiar with the matter.

The strategic options are being explored as the parent group seeks to recoup up to $13-billion by selling off up to 15 subsidiaries spread across the globe to refocus on core markets.

The review underlines how the fallout from the financial crisis continues to reshape the country's financial landscape, and could see "the guy with accent," who is ubiquitous on national television, lose his Dutch intonation.

ING Direct has grown into one of the country's leading mortgage lenders over the past dozen years and holds about $24-billion in deposits on behalf of Canadians, according to regulatory filings.

The parent has already spun off its other Canadian unit, selling the last of its property-and-casualty insurance business to Canadian shareholders two months ago in a $2.2-billion deal.

A similar float is seen as one option for the bank, alongside the possibility of a sale to a strategic buyer such as a Canadian insurer.

Manulife Financial Corp., the country's largest insurer, already operates a small banking operation, but such rivals as Sun Life Financial Inc. and Great-West Lifeco Inc. do not have the capacity to take deposits.

People close to the process stressed that there was no certainty the parent would ultimately divest its ownership of the Canadian unit, which is a net contributor to the Dutch group and a better fit than other foreign assets on the block.

Peter Aceto, chief executive of ING Bank of Canada, declined to speculate on the possibility of a divestment, but made it clear it was business as usual at the bank.

But he said ING Direct's "emphasis on retail savings and investments makes it a strong, strategic fit for ING Group."

"Our business in Canada is profitable, we are able to gather savings in an efficient manner, we underwrite excellent-quality mortgages and we execute our customer-focused, low-cost model tremendously well. Local management and ING Group are proud of our Canadian business," he said.

The bank has had unique success in Canada by operating without branches and reaching out to price-sensitive consumers through online and telephone banking services, and generates enough capital to sustain itself.

The company's marketing has focused on high-interest savings accounts and flexible mortgage products that have forced a shake-up at the country's dominant domestic banks.

The ability of the bank to retain loyal customers in the event of a divestment is seen as a key factor in its valuation and its appeal to a strategic buyer.

"How sticky are the deposits?" asked one person observing the process.

Regulatory filings suggest the deposits have held up well during the course of the financial crisis and grown at a higher rate than analysts predicted.

Mr. Aceto said, "Gathering savings directly from customers in a low-cost, tech-savvy manner and offering them simple lending and investment products to help them through their life's journey is fundamental to what ING Group wants to do and what ING Direct has always done."