Canada's interest rates likely to climb higher

Tuesday's May inflation report could provide Canadians with a reprieve from a looming round of interest rate increases next month, but don't bank on it.

Overall inflation, and core inflation which excludes volatile food and energy prices and which the Bank of Canada monitors for underlying inflation trends, are both expected to remain above the bank's two-per-cent target.

And other Statistics Canada reports, also being released this coming week -- including leading economic indicators, and wholesale and retail sales -- are expected to point to a strong economy, which central bank governor David Dodge this past week said was operating above its non-inflationary capacity.

The index of leading indicators, a basket of 10 economic activities used to forecast the direction of the economy over the coming few months, being released Wednesday, is expected to rise, reflecting recent strength in the stock market, home sales, factory shipments and employment, said Scotiabank economist Karen Cordes. Also on Wednesday, the report on wholesale sales for April is expected to show modest strength, while the retail sale report Thursday is expected to show another strong increase, reflecting in part a near seven-per-cent jump in auto sales.

TD Securities economist Jacqui Douglas said there's not much in the way in economic information between now and the July 10 fixed date for any interest rate adjustments to deter the bank from raising rates to bring inflation back down to the two-per-cent level.

"At this point, we see a rate hike in July as a near certainty, and only some fairly extreme economic data would be able to change that view," she said. "There's only a handful of Canadian data releases, and none of them seems likely to sway the Bank of Canada."

Further, over the past 10 years the central bank has never raised rates just once and then stopped, she noted.

"So we think that another rate hike in September is also a good bet."

She said the odds of a third rate hike are no more than 50 per cent, especially if the loonie continues to rise, as TD Securities expects it will.

Meanwhile, a Statistics Canada report Monday on Canada's international transactions in securities in April should help explain some of the loonie's recent strength, and another on Wednesday on travel between Canada and other countries that month should give some indication of whether the strong currency is encouraging Canadians to visit other countries, especially the U.S., and discouraging foreigners, especially Americans, from visiting Canada.

While consumers and businesses, especially those with mortgages, are watching for hints about how high rates might go, the federal government and its critics will want to eye a report Monday that assesses how Canada's government stacks up against 21 others in delivering services to its citizens.

Canada ranked first in the last study in 2005, and any slippage will be pounced on by the official Opposition Liberals as evidence of the Conservative government's shortcomings.
Meanwhile, Finance Minister Jim FlahertyVancouver Sun will meet with provincial and territorial ministers responsible for securities regulation on Tuesday at a government resort just north of Ottawa at which he will push again for a common national securities regulator, and other measures outlined in a March budget document "Creating a Canadian Advantage in Global Capital Markets."

Then, on Wednesday, he meets at the Meech Lake resort with provincial finance ministers to get their support for the federal government's "Advantage Canada" economic plan, which was released last November, including its call for elimination of total government debt within a generation, the harmonization of provincial sales taxes with the GST, and the elimination of inter-provincial barriers to the free flow of goods, services and labour.

However, his chances of getting them on board may be undermined by the bitter public dispute with several Atlantic provinces and Saskatchewan over the federal government's equalization program reforms.

(prepared by Ed Beauchesne/Vancouver Sun)