Friday, July 07, 2006

Bank of Canada Planed to Hike Rates Two More Times

The Bank of Canada should raise interest rates a further quarter point next Tuesday, and then again in September, a panel of private-sector and academic economists urged Thursday.

Five of six members of the C.D. Howe Institute's monetary policy council voted for the two increases in the bank's trend-setting target rate that would bring it to 4.75 per cent from the current 4.25 per cent.

While the central bank last month indicated that it would not raise rates further, reports since suggest that the economy has been stronger than it anticipated.

Behind the call for further rate hikes were "robust growth of demand in Canada and abroad; tight markets for goods and services, particularly for skilled labour and investment goods; and evidence from surveys and financial markets that private-sector expectations for inflation and price-setting are above the bank's two per cent target," the institute said.

There were concerns, however, about the "possibility of a stronger Canadian dollar dampening demand, and the possibility that tighter U.S. monetary policy is bringing about a slowdown south of the border," it noted.

Earlier Thursday, however, another think-tank predicted that even without any further rate hikes the economic expansion will moderate from what was 3.8 per cent growth in the first quarter of the year to 3.1 per cent for the year as a whole.

The Conference Board of Canada forecast that the slowdown will reflect the drag on exports from the strong dollar and a weaker U.S. economy, which will offset continued strength in spending by consumers and businesses here, whose finances are being bolstered by strong job growth and a lighter tax burden.

Strong consumer spending and private investment, which drove economic growth earlier in the year, will be bolstered by federal tax cuts and healthier-than-expected revenues for provincial governments, it said.

Still, it said growth will be limited by a further erosion in the trade balance, which could be even worse than anticipated, if rising interest rates and high energy prices weaken U.S. consumer spending more than expected.

However, the latest data on the Canadian economy continue to point to economic strength, with Statistics Canada reporting a greater-than-expected 6.9 per cent rebound in building permits in May to $5.4 billion, the third-highest level on record and the sixth straight month that construction intentions have exceeded the $5-billion mark.

The strength was mainly in the non-residential sector, and the rebound failed to recover all the ground lost from the steep drop in building plans the previous month.

Contractors took out $2.1 billion in permits for non-residential projects, up 18.1 per cent following a 19.5 per cent plunge in April the big gain reflecting vigorous industrial, commercial and institutional building intentions, especially in Alberta and British Columbia, it said.

Housing permits, meanwhile, edged up 0.7 per cent to $3.3 billion, thanks to strength in apartment and condo construction plans, which offset continued weakness in plans for single-family construction.

The steepest increases in home-building intentions during the month were in Ontario and Quebec, and the largest declines in Alberta. However, 22 out of 28 metropolitan areas have showed stronger home-building intentions this year than last, led by big advances in Calgary, Edmonton and Vancouver, while Toronto and Hamilton have showed the largest year-over-year declines.

The continued strength in housing reflects gains in full-time employment and in disposable income, it said.

But a separate report suggests some slowdown in business activity.

The Ivey index of business sentiment, based on a monthly survey of changes in business purchases, prices, inventories, deliveries and employment, fell to 62.2 from 75, suggesting a slowdown in activity.

Analysts nevertheless said it is still pointing to strong business activity. A reading of more than 50 suggests business activity is increasing, while a reading of less than 50 suggests it is contracting.

The results of the June survey of 175 companies across all sectors of the economy diverged significantly from the more pessimistic findings of Statistics Canada's latest survey of some 4,000 manufacturing firms, which saw a sharp decline in manufacturing sentiment and production, noted Ted Carmichael, economist with J.P. Morgan.

That gap in sentiment highlights the gap in relative performance of Central Canada's struggling manufacturing sector and the rest of the economy, especially the booming resource sector in Western Canada, he noted.

The Ivey price index, meanwhile, rebounded to a more-than-six-month high of 72.4 in June from 70.3 in May, levels which, Carmichael noted, have in the past been followed by interest rate increases by the Bank of Canada.


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