Doubts Rise Bank of Canada Will Ease in June

May 27, 2008

Despite indications that Fed easing is on hold, a 25-bp rate reduction by the Bank of Canada on June 10th had been perceived as highly probable. Real GDP had risen just 0.8% saar in 4Q07. Wholesale turnover had declined in both 4Q07 (-0.3%) and 1Q08 (-0.8% from 4Q and -0.4% from 1Q07). Canada’s index of leading economic indicators is unchanged on balance since the end of 2007. Retail sales advanced by a decent 1.8% in 1Q08 but posted back-t0-back weak results in February (down 0.8%) and March (up 0.1%).

Then came a surprise CPI report in April. Canada had been a rare exception to the global trend of accelerating inflation, further promoting speculation that the overnight money rate target, which has been reduced since December to 3.0% from 4.5%, would be lowered again. In April, however, consumer prices increased 0.8%, lifting the annualized seasonally adjusted pace of inflation to 1.9%, just a tenth under target. Core CPIX inflation backed up to 1.5% from 1.3% and would have been a half-percentage point higher if not for the impact of a reduced national goods and services tax. Gasoline price inflation accelerated to 11.6% y/y from 7.9% in March, and all other prices collectivley advanced 1.3% y/y, up from 1.0% in February. Even more intensive commodity price inflation since April suggests that last month’s spike in price pressure will not be a one-month fluke. The Bank of Canada’s Governor has warned that policymakers will take into account commodity price developments when they decide what is the most appropriate interest level.



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