INTEREST RATES: Interest rates may rise

Bond yields and mortgage rates could head higher before the Bank of Canada's pledge to hold interest rates steady expires in July, the chief economist at Bank of Nova Scotia said yesterday.

"There's a very good chance long-term rates will head up before then," Warren Jestin said in Toronto at a briefing sponsored by the Investment Funds Institute of Canada.

He warned new homeowners with variable-rate mortgages not to be influenced by the central bank's neutral statements on rates on Tuesday. The bank has pledged to hold rates at a historic low of 0.25% until the end of the second quarter of next year, inflation conditions permitting.

Read the "fine print" and he believes it's likely three-year and five-year mortgage rates will be higher before July 2010.

Mr. Jestin does not foresee a double-dip recession. "Those who expect renewed recession next spring will be proved wrong." For North America, "2010 is a year we fill in the hole we dug for ourselves in one of the most vicious recessions in our lives." But the global economy will grow at a "slower rate than we'd consider normal a few years ago. We believe expansion won't be that strong in 2011 so we don't see rates continuing up in 2011."

Christopher Probyn, managing director and chief economist for State Street Global Advisors, expects the U.S. Federal Reserve will raise interest rates by 0.75% to 1.5% in the second half of 2010. However, he said inflation may run surprisingly low so the Fed could "be on hold much longer than people anticipate."

The 2008-2009 period was by far the worst economy since the International Monetary Fund started collecting data in 1970. "For the first time, there was a contraction in the global economy." Growth in world gross domestic product fell from over 5% in 2007 to 3% in 2008 but went to -2.5% in 2009.

The low was the first quarter of 2009, when the economy contracted at a rate of 6% annualized. But it was flat in the second quarter and returned to positive growth in the third, "so throughout 2009 there has been progressive improvement."

Mr. Probyn foresees a sustained but "rather gradual" recovery, with GDP expanding 2.5% in 2010. Last week's favorable employment report suggests the next stage in recovery may already have arrived. "Maybe we're very close to achieving stability in the labor market," Mr. Probyn said.

Like Mr. Jestin, he doesn't foresee a double-dip recession in 2010. He said the recovery is more likely to be U-shaped, with some bouncing along the bottom, than the instant rebound of a Vshaped comeback.

("Interest rates may rise despite BOC deadline" prepared by Jonathan Chevreau/Financial Post/National Post)