Preview of Canadian Interest Rate Policy Announcement: 3.0% to Be Retained

July 14, 2008

The fifth of eight scheduled interest rate announcements in 2008 is set for the usual 13:00 GMT hour on Tuesday.  My forecast of no change in the 3.0% rate is the same as the consensus.  Like most other economies, Canada is tasting a mild case of stagflation, and no near-term rate changes are anticipated.  Consumer prices advanced 4.7% saar in the three months to May and by 3.2% saar over the past six reported months. The latest survey of expected inflation found 36%  of those participating endorsing the belief that CPI inflation will exceed 3.0% in the coming year.  That exceeds target by over a percentage point and represents a big deterioration from confidence in price stability expressed three months ago.   First-quarter growth was negative, and jobs expanded just 0.7% at an annual rate during the four months to June.  Real GDP in Canada bounced 0.4% in April but posted a 12-month increase of only 1.2%, including a 4.5% decline in industrial production.  The Canadian dollar has been stable near par with its U.S. counterpart, averaging 1.0156 per USD so far in July, 1.0141 in June, 0.9983 in March, and 1.0140 in April.  These levels are considerably weaker than the $0.9061 peak in early last November.  Back then, the Bank of Canada target rate was still at 4.5%.



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