Bank of Canada leaves key overnight rate unchanged at 4.50 pct

Sep 5, 2007 - The Bank of Canada said it has left its key overnight interest rate unchanged at 4.50 pct.

The decision had been widely expected given the recent financial market turmoil, in contrast to forecasts a few weeks back that the central bank would raise rates by a quarter point.

In its accompanying statement, the BoC said the recent market uncertainty could now serve to dampen domestic demand, which it said had remained "robust", buoyed by "a continuing strong labour market and higher-than-expected increases in home sales and prices".

"Recent developments in financial markets have led to some tightening of credit conditions for Canadian borrowers, which should temper growth in domestic demand," it said.

The Bank said it will continue to closely monitor evolving economic and financial developments.

Canadian total and core annual inflation, at 2.2 and 2.3 pct respectively, has continued to be above the Bank's inflation target but generally in line with its forecasts. At the same time, the pace of economic growth in the first half of the year was above the Bank's expectations, it said.

"It now appears that the Canadian economy is operating further above its production potential than was estimated in July," the BoC said in an accompanying statement.

The BoC said there are "significant upside and downside risks" to the inflation outlook. On the upside, Canadian household demand could be stronger than anticipated, while on the downside the downturn in the US housing sector could become more severe and spill over into the broader US economy.

It now appears that the US housing market slowdown will be "more pronounced and protracted", exacerbated by the turmoil on financial markets.

On balance, this "implies weaker demand for Canadian exports" than had been assumed at the time of the July Monetary Policy Report, it said.

The BoC is tasked with keeping inflation at the midpoint of its 1-3 pct target.

Canadian economy up 3.4 pct in Q2 on strong spending

Aug 31, 2007 - Canada's economy roared ahead for a second straight quarter on strong consumer spending, likely pushing the Bank of Canada to resume hiking interest rates as soon as the credit market turmoil subsides.

Consumers spent heavily on durable goods like cars and household appliances, making them the biggest contributor to stronger-than-expected 3.4 percent annualized economic growth in the quarter, Statistics Canada said on Friday.

A surge in oil and gas exploration lifted June gross domestic product by 0.2 percent, down from growth of 0.3 percent in May.

Analysts had expected growth to moderate to 2.8 percent in the second quarter after a 3.9 percent growth spurt in the first quarter, and they had expected zero growth in June.

"It was a barnburner performance for consumers in particular but it was a solid report through and through," said Eric Lascelles, strategist at TD Securities. "It certainly does reiterate the point that the Canadian economy is on fire."

Statscan revised its first-quarter GDP growth number upward from 3.7 percent.

The fast growth is likely to make the Bank of Canada's job a little less easy when it ponders its next interest rate announcement on Sept. 5.

After hinting in July that it would hike its key overnight lending rate for a second time, the bank has made clear that financial market liquidity problems caused by the global credit squeeze takes first priority and that higher rates can wait.

"From a domestic standpoint there is still a very compelling case that the bank's next move will be to hike rates," said Porter. "So the issue now is how long does the bank have to wait before they get back on the tightening wheel."

The bank raised its overnight rate by 25 basis points to 4.50 percent on July 10 after pausing for over a year. On Monday, Deputy Governor Pierre Duguay said the risks to economic growth have grown as a result of the credit turmoil, and the bank would take that into account when reviewing rates.

Recent inflation data have been tame, buying the central bank more time. But the fast-paced growth reinforces the bank's concern that there is excess demand in the economy, which in turn fuels inflation.

Statscan noted strength throughout the economy. Personal spending rose 1.2 percent in the quarter, and business investment and housing construction also posted healthy gains. Exports climbed after a steady first quarter but their 0.7 percent rise was outweighed by a 1.6 percent surge in imports.

Even the beleaguered manufacturing sector, reeling from job losses and a strong Canadian dollar, registered its first quarterly gain since the fourth quarter of 2005, advancing 0.3 percent.

Compared to the first-quarter of this year, Canada's economy grew 0.8 percent.

Canada current account surplus rises to C$8.36 bln

Aug 30, 2007 - Canada's current account surplus widened in the second quarter to C$8.36 billion ($7.86 billion) as the trade surplus swelled for a third straight quarter, despite the strong Canadian dollar.

Statistics Canada said on Thursday that was up from C$6.11 billion in the first quarter, revised down from C$6.49 billion. Analysts in a Reuters poll had forecast, on average, a surplus of C$8.5 billion in the second quarter.

The surplus was built partly on the back of lower imports of machinery and equipment, which economists said did not bode well for productivity improvements in the future.

"It's a bit discouraging that Canadian businesses don't seem to be taking advantage of what is arguably almost a perfect opportunity for investing in new machinery and equipment," Toronto-Dominion Bank's deputy chief economist, Craig Alexander, said. He said the strong currency made imports cheaper, and companies could have afforded to invest because of strong profits and low borrowing costs.

"You would have thought that all of these pieces would have fallen together to drive stronger business investment in machinery and equipment," he said, noting that Canada's productivity numbers have disappointed.

The surplus in goods reached its highest level since the fourth quarter of 2005, Statscan said, with a new high in exports of industrial materials combining with shrinking imports of machinery, equipment, automotive products and consumer goods.

However, Statscan said total exports in the second quarter were virtually at the same level as in the first quarter, due to declines in the export of other goods.

The services deficit declined for the second straight quarter as receipts from U.S. travel visitors increased. But the services deficit remained close to the record high registered in the fourth quarter of 2006.

"Overall, the surplus remains at quite healthy levels, despite the lofty loonie (Canadian dollar), as strong commodity prices, especially oil, are compensating for the deterioration in Canada's competitive position," BMO Capital Markets deputy chief economist Douglas Porter said.
The figures, all seasonally adjusted, feed into the quarterly gross domestic data that will be released on Friday at 8:30 a.m. EDT (1230 GMT).

The median forecast by analysts, taken in a Reuters survey last week before the current account data was released, is for annualized growth of 2.8 percent. The 21 projections ranged from 2.4 percent to 3.4 percent.

Canada producer prices sink 0.7 percent

Aug 30, 2007 - The appreciation of the Canadian dollar and falling metals prices knocked down industrial product prices by a bigger-than-expected 0.7 percent in July from June, according to Statistics Canada data on Thursday.

Analysts in a Reuters poll had forecast, on average, a 0.5 percent decline in the price of goods at the factory gate. Prices had fallen 1.2 percent in June, Statscan said after revising that figure from 1.3 percent previously.

A jump in crude oil prices, however, pushed raw materials prices up by 3.9 percent in the same period, outshining forecasts for a modest 0.5 percent gain.

A downturn in prices for primary metals products such as nickel and the rise in the currency, which lowers prices for motor vehicles, were the main factors pushing the producer price index lower.

Year-over-year, producer prices fell 0.3 percent and raw materials prices jumped 3.5 percent.

Canada forecasts faster growth, bigger surplus

Aug 24, 2007 - Canada's economy is growing faster than expected this year and this should deliver a larger federal budget surplus than originally forecast, the Finance Department said on Friday.

"The budgetary surplus for 2007-08 is now expected to come in higher than the budget 2007 projection of C$3 billion ($2.9 billion)," the department said in its quarterly update of the fiscal outlook.

"The improved outlook stems from stronger-than-expected economic performance, as well as higher-than-anticipated revenues as suggested by year-to-date financial results. Program expenses are expected to be largely unchanged from the budget 2007 outlook."

It said the budget surplus in June was C$2.85 billion, up from C$2.26 billion in June 2006. The April to June surplus was C$6.36 billion, up from C$5.89 billion in the same period last year and more than twice the originally forecast surplus for the whole fiscal year.

It did not say how much more than C$3 billion it thought this year's surplus would be, noting that a comprehensive update would come in the autumn Economic and Fiscal Update.

Canada is the only country in the Group of Seven leading industrialized nations to be running budget surpluses.

The department released an updated economic forecast, which it takes from private-sector economists, to show real economic growth this year of 2.5 percent, up from the 2.3 percent forecast in the March budget. But the economists cut the forecast for 2008 to 2.7 percent from 2.9 percent.

The economists significantly boosted their projections for GDP inflation -- used to determine how much of nominal growth in gross domestic product is due to higher prices. For 2007 they saw GDP inflation of 2.7 percent instead of 1.5 percent, and for 2008 they boosted their forecast to 2.2 percent from 2.0 percent.

Consequently, nominal GDP growth, which has a strong correlation with tax revenues, has been revised up to 5.2 percent for 2007 from 3.9 percent. The figure for 2008 remains unchanged at 5.0 percent.

This would leave nominal GDP about C$20 billion higher in both 2007 and 2008 than projected in the March budget.

In its figures for what has already been spent in the first three months of the fiscal year, which started in April, the government showed that total spending had risen by 6.7 percent from the same period in 2006 to C$54.00 billion.

Flaherty has promised to limit spending to the rate of nominal growth in GDP on average over the mandate of the Conservative government, but he spent at a higher rate than that in the government's first year in office.

($1=$1.05 Canadian)

Canada July inflation steady, rates seen on hold

Aug 21, 2007 - Canada's annual inflation rate held unchanged at 2.2 percent in July and the core rate fell to 2.3 percent from 2.5 percent in June, a steady performance that analysts said makes an interest rate rise in September highly unlikely.

Statistics Canada said on Tuesday that lower energy prices countered the fact that a sales tax cut on July 1, 2006, dropped out of the annual inflation calculations. The tax cut had reduced inflation by an estimated 0.6 percentage points in July last year. Energy prices fell 1.7 percent from July 2006.

"At the very least you can say it will give the Bank of Canada a bit more comfort in standing on the sidelines in September as it waits out the financial market squalls," BMO Capital Markets deputy chief economist Doug Porter said of the July figures.

BMO changed its interest-rate forecast on Tuesday and said that instead of raising rates in September, as had been widely expected earlier this summer, the Bank of Canada would stay on hold until next year.

The central bank targets inflation at 2 percent and tries to keep it between 1 and 3 percent. In July it said overall and core inflation was higher than projected, but should decline to 2 percent by early 2009.

The bank last month forecast total inflation of 2.6 percent in the third quarter, rising to 3.0 percent in the fourth. It saw core inflation, which strips out volatile items, at 2.3 percent in the third quarter and 2.2 percent in the fourth.

Before the latest financial market turmoil, the bank had said further rate hikes may be required, but analysts now increasingly expect it will stand pat on Sept. 5, its next scheduled interest rate announcement date. There's even been talk of a quick rate cut.

Another indicator came in soft on Tuesday. Retail sales in June declined by a greater-than-expected 0.9 percent from May, when sales rose by a decade-high 2.6 percent. Overall for the second quarter, retail sales rose by 3.0 percent.

TD Securities forecasts the Bank of Canada will hike rates in October after giving September a miss, pointing out rising wage growth and low unemployment.

"I think the market perspective is if inflation gets sufficiently soft that opens the door to rate cuts, and I don't think this number is sufficiently soft to really support that," TD Securities strategist Eric Lascelles said.

The central bank also faces the challenge of uneven performance across Canada. Prices rose a year-on-year 5 percent in the oil-boom province of Alberta, but they were up only 1.0 percent in Newfoundland, and 1.3 percent in Quebec.

Strong C$ helps cut June Canada factory shipments

Aug 15, 2007 - The strong Canadian dollar contributed to the third consecutive monthly decline in Canadian manufacturing shipments in June, a greater-than-expected 1.8 percent from May, according to Statistics Canada on Wednesday.

The struggling sector, which lost 53,000 jobs in the last year, still managed to post a second-quarter gain of 0.7 percent from the first quarter. But the first half of the year saw an increase of only 0.1 percent from a year earlier.

Motor vehicle shipments in June plunged for the third straight month, by 13.3 percent, the largest monthly loss since August 2003. Statscan attributed it partly to "an appreciating Canadian dollar and soft conditions in the U.S. auto market."

The aerospace sector also fell by 4.6 percent, machinery by 2.8 percent and primary metals by 0.8 percent. However the aerospace sector was also the source of strong unfilled orders. Total unfilled orders rose by 2.0 percent from May; the biggest component of that is aerospace, which went up by 2.7 percent. Year on year, aerospace unfilled orders are up 56 percent.

Analysts surveyed by Reuters had on average expected overall shipments to decline by just 0.2 percent.

Aircraft decline narrows Canada June trade surplus

Aug 14, 2007 - A slump in aircraft sales led to a third straight monthly drop in Canadian exports in June, which narrowed the trade surplus to C$5.27 billion ($4.97 billion) from C$5.87 billion in May, Statistics Canada said on Tuesday.

Imports grew to C$34.05 billion from C$33.86 billion, as purchases of industrial goods and machinery and equipment more than offset declines in all other sectors. Exports fell to C$39.32 billion from C$39.73 billion.

Indeed, the surplus was narrower than economists' median forecast of C$5.6 billion in a Reuters survey. The surplus with the United States was unchanged at C$7.65 billion.

Exports in the aircraft sector, which had seen strong gains in January and May, fell by C$388 million to C$1.24 billion. Automotive exports also declined, for a third month in a row, by 1.7 percent, as some plants closed earlier than usual in preparation for new models.

Energy exports edged up 0.1 percent to C$7.9 billion, and exports of chemicals, plastics and fertilizers set a new high of C$3.2 billion, partly on the strength of uranium sales as countries expand nuclear capacities, the federal agency said.

With uranium prices 10 times higher than in 2001, the sector has become increasingly important to Canada, the world's largest uranium producer, the agency said. In the first six months of 2007, exports jumped 162 percent to C$2.3 billion from C$863 million a year earlier.

Statistics Canada said rising exports of crude oil -- due to higher volumes as prices fell 3.1 percent -- and natural gas offset falling exports of refined oil and coal products.

Energy imports fell 1.0 percent to C$3.1 billion, largely on a lower volume of crude imports.

($1=$1.06 Canadian)