Bank of Canada Preview

April 20, 2009

Canada’s target interest rate is already very low — just 0.5% on overnight borrowings — and will at most be lowered 25 basis points on Tuesday. The meat of tomorrow’s central bank statement involves the likelihood and extent of credit and quantitative easing that will be unveiled.  In the prior statement on March 3, “a framework for possible use of such measures” was promised.

From December 2007 to April 2008, monetary officials cut their key rate four consecutive times and by 150 basis points in all to 3.0%.  Rate cutting then took a hiatus until October because of a commodity-related spike in inflation to 3.5%.  Canada was not exempt from the rapid darkening of the global economy last autumn, and rates were cut there five more times from October to March of this year for an additional total reduction of 250 basis points.

New  and lower central bank forecasts will be unveiled this week.  Back in January, officials projected negative growth of 4.8% at a seasonally adjusted annual rate in 1Q09 and -1.0% saar in 2Q09 but optimistically anticipated positive growth thereafter of 2.0% saar in this year’s third quarter, 3.5% in 4Q09, 4.7% saar in the first half of next year and 4.9% saar in 2H10.  The predicted recovery looks too soon and too powerful.  Real GDP contracted 3.4% in the final quarter of 2008, about 50% more than Bank of Canada officials had forecast.  The Canadian component of the OECD index of leading economic indicators dropped 1.2 points in February and posted one of the largest declines in the group during the first two months of this year.  A recent survey by the Bank of Canada found credit conditions to be very tight in spite of the rapid decrease of the target interest rate.  Canada’s labor market has collapsed sharply with the jobless rate rising from 6.1% in September to 6.6% in December and 8.0% in March and full-time workers contracting by 375K over the last four reported months.  That would be akin to a loss of around 3 million in the U.S. labor market.  Canadian capacity usage is the lowest in at least 22 years, and CPI inflation has slowed to 1.2%.  Housing starts and permits are very depressed, and exports posted a 12-month drop in February of 16.8% despite a 5.2% monthly bounce.  The average reading for the IVEY-PMI index was 41.5 last quarter, implying a continuing severe contraction of the Canadian economy.  Recovery prospects depend in part on rebounds in the U.S. auto and housing sectors as well as in energy and other world commodity prices.

The Bank of Canada announces its monetary policy changes at 13:00 GMT on Tuesday.  The Bank’s semi-annual Monetary Policy Report arrives on Thursday.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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