Sunday, January 15, 2012 - 17:55

Bank of Canada To Continue Keeping 1.0% Key Interest Rate

--BOC Likely Sees Nothing Compelling To Reduce Or Hike Rate
--Expected To Reiterate European Concerns

OTTAWA (MNI) - The Bank of Canada likely will maintain its policy interest rate at 1.0% on Tuesday, seeing nothing compelling at home or in troubled markets abroad to alter the rate it has held since September, 2010.

Given growth but slowing growth at home amid mixed domestic indicators of confidence and caution, and United States and China uncertainties, analysts nearly unanimously expect the BOC to hold to a wait-and-see approach at its fixed setting date Tuesday morning.

The 1.0% rate is described by the Bank as providing "considerable monetary stimulus" in Canada, sufficient to help keep the economy growing. The brief Bank statement Tuesday is expected to repeat that wording, as is the detailed quarterly Monetary Policy Report on Wednesday.

The 1.0% rate set September 8, 2010, marked a brief and rapid rise from the rock-bottom 0.25% rate set in the dark of recession in April, 2009. That rate lasted until June 1, 2010, when it rose to 0.50%. It rose again, to 0.75%, on July 20, and to 1.0% on September 8.

It has since stayed at 1.0% despite renewed financial strain and tumult in Europe and some slowing of demand from China --- "the only G-10 central bank not having eased policy since last March," says economist Michael Gregory of BMO Capital Markets. This is so although slowing growth was pictured in Canadian employment, which rose strongly in 2010 and the first half of 2011, having slowed to a trickle in the second half (+190,000 in H1 vs +7,000 in H2).

Most economists agree with Dina Cover of TD Economics that "we don't expect to see a major uptick in employment in Canada in the near future," mainly because of concerns over the continuing economic disarray in Europe and worries that some of the recent signs of recovery in the United States will not be sustained.

While economists generally agree that the present 7.5% unemployment rate in Canada will rise slightly over this year, the businesses themselves do not quite see it that way. The Bank of Canada's winter survey of firms showed that 54% expected to hire more employees over the next 12 months and 37% would stay the same - only 9% planned to reduce their numbers of employees.

Confidence levels in the economy have diminished but are not depressed. In the BOC survey, 59% expected a higher or the same pace of sales growth this year than in what was for them a good year past: 41% expected sales volumes to increase but at a slower pace. Further, 81% of firms plan to increase investment in plant and equipment or spend the same as in the past year. A recent Bank of Montreal survey of firms is similar: 79% of business owners would invest the same amount or more in their businesses in 2012. Only 13% expect 2012 to be a worse year for them than 2011, while 51% expect it to be better.

The Bank of Canada may well upgrade its past projections of Canadian and North American growth. It admitted last month that U.S. growth "has been slightly more robust than anticipated," while recent indicators from Canada's huge market (70% of Canadian exports go there) are mixed but provide some optimism. The BOC had expected 2.0% third quarter 2011 GDP growth in Canada, which turned out to be 3.5%. It expected 0.8% Q4 growth, while most analysts peg Q4 growth in Canada was about 2%.

Paul Ferley, Assistant Chief Economist for RBC Economics, said in an interview that he sees U.S. demand for Canadian exports strengthening. Merchandise trade figures, out last week, show a strong $1.1 billion increase in Canada's trade surplus with the U.S. (to $4.6 billion) in November, and a 1.9% increase in exports, on energy products but also on the key automotive trade.

"Auto sales to the United States are improving, on volumes rather than on prices, in a pretty strong upward trend, indicating stronger U.S. spending and demand," he said.

"We seem to be seeing a slightly better tone in Europe," although very real risks remain, he added. He expected, however, that the BOC would reiterate its concern for European sovereign debt issues affecting the global economy.

Ferley and other economists generally expect about 2% GDP growth in Canada in 2012, while David Tulk, Chief Canada Macro Strategist at TD Securities, expects the BOC to revise its annual real GDP forecast for this year from 1.9% down to about 1.7%.

Benjamin Reitzes, senior economist at BMO Capital Markets, said in an interview that the BOC will not want to reduce its key rate, despite the Canadian economy probably going into a slower-growth year, because it will not want to give further encouragement to borrowing by households. Household debt in Canada has reached very high limits historically, not to present danger levels necessarily but to some vulnerability should interest rates rise substantially. Core inflation is running at 2.1% on an annual basis, very nearly at the Bank's 2.0% target.

Canadian home mortgage lenders, prominently the Big Six national chartered banks, told an investor conference last week that the housing market in Canada is showing signs of peaking and housing prices are cooling. A few days later, Bank of Montreal led the way with a reduction in its five-year fixed home mortgage rate to an unprecedented low of 2.99%. The other banks soon followed with the same or similar reductions.

** Market News International Ottawa **


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