Bank of Canada Preview

March 1, 2010

In April 2009 when the Bank of Canada halved its overnight target rate to 0.25%, officials made a conditional promise not to raise that rate above 0.25% before the July 2010 meeting.  The one stipulation expressed that the inflation outlook remain benign has not been jeopardized, so the central bank’s pledge has been reaffirmed after every subsequent meeting.  Tuesday’s rate announcement at 09:00 EST (14:00 GMT) will be no different.

On many grounds, rate tightening would be ready to roll even now.  Improving Canadian financial market conditions have allowed temporary liquidity facilities to be unwound.  Canada continues to attract substantial net capital inflows.  The labor market has been much healthier than the U.S. labor market, with jobs advancing by a solid 2.4% annualized between October and January.  In December, motor vehicle sales increased 2.6%, while overall factory sales and orders went up 1.6% and 7.4%.  The index of leading economic indicators soared at marginally more than 14% annualized between August and January.  Inventories are getting leaner.  Building permits and house prices are trending higher.  Merchandise exports increased 1.7% in December and 5.9% last quarter.  The current account deficit narrowed 29.2% in the fourth quarter and to 4.7% of GDP from 6.7% in 3Q.  The on-year increases of consumer prices in January (1.9%) and wage earnings in December (2.9%) were their largest since November and October of 2008, respectively.

Today’s fourth-quarter GDP data revealed real growth of 5.0% annualized, versus 3.3% assumed by monetary officials.  The 5.0% outcome stood on three pillars.  Personal consumption, residential construction and net foreign demand respectively accounted for 2.1, 1.8, and 1.5 percentage points of the growth rate in GDP.  Monthly GDP data indicate an even stronger 5.5% annualized rate of growth over the final third of 2009 and the briskest growth in December for any month in three years.

Canadian officials should not feel any urgency to break their pledge and raise rates early.  Inventories and non-residential investment still made negative contributions to growth last quarter, and an appreciating currency is holding down producer prices, which fell 0.3% in the year to January but would have risen 3.6% if the Canadian dollar had merely stayed steady.  Canada’s GDP and personal consumption deflators fell 1.9% and rose 0.5% in 2009.  First-quarter growth due in three months will get a lift from the Vancouver Olympics.  Moreover, Bank of Canada officials in January predicted that GDP would rise by at least 4.0% annualized in both the second and third quarters of this year, implying now a three-quarter sequence of about 4.4%.  Canadian GDP firmed marginally in 2008 and fell 2.6% last year, much less than the declines of Japan and Europe.  The kind of growth now envisaged and the very low 0.25% target interest rate indicate that Canadian officials will have a lot of ground to traverse once they get around to raising rates this summer.  Like the Fed, policymakers meet just eight times a year and four times during 2H10.  Moving by increments of 25 basis points per meeting will be inadequately slow.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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