Bank of Canada rates unlikely to budge, but statement could enlighten.

By Derek Abma, Canwest News ServiceDecember 4, 2009

OTTAWA – No changes in the numbers are expected this coming week when the Bank of Canada issues a decision on interest rates on Tuesday, but that doesn’t mean it won’t be interesting.

The central bank’s benchmark interest rate is expected to remain at an all- time low of 0.25 per cent, with the risk of inflation still minimal and the economy – as far as the recent numbers show – keeping a good distance from boiling over.

However, as CIBC World Markets chief economist Avery Shenfeld pointed out, it might be enlightening to see how Bank of Canada governor Mark Carney explains the third-quarter expansion of just 0.4 per cent in gross domestic product, annualized, when he was originally calling for two per cent.

Shenfeld said the central bank would “refresh its growth and inflation story,” while “conceding a slower start to the GDP recovery and the drag from persistent Canadian-dollar strength, but pointing to solid momentum in employment, household credit and domestic demand.”

In his Friday research note, Shenfeld noted job growth of 79,100 positions in November, but added that the central bank “is too savvy to read too much into one-month’s employment figures, given the wide standard error inherent in the survey.”

Shenfeld said the average growth of 25,000 jobs over the last four month is a more reliable sign of the true trend. He said since 1994, the Bank of Canada has typically waited until the unemployment rate is down a full percentage point from its cycle peak before raising interest rates that had been lowered to stimulate the economy. At the current job-growth rate, Shenfeld estimated it would be well into 2011 before this happens.

The most recent job trends put Canadian unemployment at 8.5 per cent. It topped out at 8.7 per cent in August.

Eric Lascelles, chief economics and rates strategist with TD Securities, said the Bank of Canada will likely repeat its intention of keeping interest rates at rock-bottom levels until the middle of next year, but retain its prerogative to be flexible.

While the risk of excessive inflation remains low, Lascelles wrote in a report, the central bank on Tuesday could put more emphasis on the potential inflation dangers that exist, such as the hot housing sector and domestic spending.

The most recent cost of living numbers, for October, put the annual inflation rate at 0.1 per cent, which was the first time in five months prices hadn’t been lower. The consumer price index for November is due out Dec. 17.

Also Tuesday, Canada Mortgage and Housing Corp. is due to report November’s housing starts. Economists expect an annual rate of 156,000, down slightly from 157,300 in October but well ahead of the depths hit in April, when the level fell to 118,500.

On Thursday, Statistics Canada provides data on Canadian trade for October. Economists are anticipating a trade deficit of about $700 million, narrowed down from a $927-million shortfall in September.

The various estimates include a call for a bigger $1.2-billion deficit from TD, while CIBC expects exports and imports to be approximately even for October.

“Export volumes likely picked up in line with improving global demand, while prices got a lift from the 13 per cent rise in commodity prices in October, although the loonie’s gain in the month will wipe out part of the increased Canadian-dollar export revenues,” CIBC economist Krishen Rangasamy wrote in a research note.

Meanwhile, Millan Mulraine, economics strategist with TD Securities, said “exports are expected to edge lower as the impact of the 16 per cent month-to- month surge in auto-related exports in September washes out of the data. Moreover, with the 2.4 per cent surge in the average price of the Canadian dollar in October further eroding the competitiveness of Canadian products on the global market, exports of other commodities should also weaken.”

Canwest News Service
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