INTEREST RATES: Bank under pressure to raise rates
Pressure on the Bank of Canada to move early on raising interest rates mounted Monday after fourth-quarter data on gross domestic product suggested the economy is roaring its way out of the recession after recording the fastest pace of growth in nearly a decade.
The central bank could provide hints of a change today when it releases its latest statement on rates. Its plan for almost a year has been to conditionally keep its benchmark rate at 0.25 per cent until at least July in an effort to pump up economic growth after the recession.
Data from Statistics Canada suggested the emergency-level rates have worked their magic, perhaps faster and better than anticipated.
The economy expanded five per cent in the final three months of 2009, blasting past market expectations for a four-per-cent gain -- and the central bank's 3.3 per cent forecast -- and setting the stage for robust growth this quarter. It is also the fastest pace of quarterly economic growth since late 2000. Further, the data were solid almost across the board, with personal consumption and net trade contributing to the performance. Third-quarter data were also revised upward, with growth of 0.9 per cent as opposed to the original 0.4-per-cent reading.
This comes on top of January inflation data that indicated price increases had moved closer to the central bank's two-per-cent target earlier than anticipated.
"With growth being stronger than expected and inflation sticky, we remain of the view that the Bank of Canada has the full green light to hike as emergency conditions have passed, and with it justification for sticking to the zero lower bound on rates," said economists Derek Holt and Karen Cordes from Scotia Capital in a research note.
Yanick Desnoyers, assistant chief economist at National Bank Financial, said a rate hike could come as early as April, when data might show the output gap -- or the amount of slack in the economy -- is narrowing faster than the central bank expected.
He said the headline GDP data might be underestimating how quickly economic slack is being absorbed. For instance, gross domestic income -- or the sum of all wages, corporate profits and tax revenue -- climbed by 8.5 per cent in the quarter, the best showing since 2005. And that follows a 4.5-percent gain in the third quarter.
Not all analysts believe the data will push Bank of Canada governor Mark Carney to veer off course. Douglas Porter, deputy chief economist at BMO Capital Markets, said the data surely raise the odds of a July rate rise, but anything earlier is unlikely. Analysts at TD Securities also shared a similar view.
The GDP data contained one key blemish: a 9.2-per-cent drop in machinery and equipment investment by Canadian companies, which does not bode well for efforts to boost productivity levels. The GDP data attracted investors, as the Canadian dollar gained a full cent to close at 96.01 cents US on Monday on the possibility of an early rate hike.
Canadian growth should remain robust as the global recovery takes hold. Business surveys indicated manufacturers continue to lead the recovery, with factory activity expanding across Asia, the U.S. and Europe.
