Bank of Canada Expected to Retain 0.25% Key Interest Rate Tues

Date: Monday, March 1st, 2010

By Courtney Tower

OTTAWA (MNI) – Financial markets looking for guidance likely will find little to move them, either up or down, in the Bank of Canadas policy rate announcement Tuesday.

It is a given among analysts that there will be no change to the central banks historically low 0.25% overnight rate, Tuesday (9:00 a.m. ET/1400 GMT) or in the subsequent rate announcement April 20.

There is no reason in Canada’s economic posture, with plenty of slack and low productivity, or in United States and world recovery (slow and disappointing) to persuade the Bank to alter its pledge to keep the fiscal stimulus at 0.25% through this years first half.

Most expect little change, either, in the short BOC policy statement about its reading of the future about the slack in the economy and reflecting little concern about inflation.

The numbers on are surprisingly strong, the core having reached the Bank’s 2.0% target in January. But this level is expected to be short-lived, said Diana Petramala of TD Economics. She wrote that the spike to 2.0% was largely due to “a base-year effect … prices fell significantly in January of 2009.”

“Looking forward, a persistent output gap will keep inflation under wraps for 2010, and the Bank of Canada will be able to keep its commitment on holding the rate through the first half,” Petramala wrote.

Analysts see little help for Canadian exports coming from U.S. demand, either, despite marked economic growth in the past three months. They see this spurt as temporary, based on restocking of inventories and driven by public stimulus programs rather than by a sustained private recovery.

All in all, writes Avery Shenfeld of CIBC Economics, “look for the Bank to wait even longer than promised, until early 2011, to pull the trigger on rate hikes.”

Shenfeld adds: “There is simply no need for the Bank of Canada to hurry up and tighten.”

He sees fiscal as well as monetary policy remaining stimulative all year, as repeatedly pledged by Finance Minister Jim Flaherty who brings down a new federal budget Thursday. For this year overall, despite encouraging GDP numbers in the early going, Shenfeld sees only “a half-speed, 2% recovery.”

Canadian GDP results for the fourth quarter of 2009, published by Statistics Canada Monday, will not influence immediate Bank of Canada thinking, analysts believe, although they might, if continued, cause rate hikes to begin later this year.

The economy expanded at a 5.0% annualized rate in the fourth quarter of 2009, faster than the 3.3% gain predicted by the Bank of Canada and stronger than most analyst expectations of a 4.2% to 4.5% increase.

The fourth quarter growth in GDP was the strongest since the third quarter of 2000, Statistics Canada said. It was broadly based, including a further increase in exports over imports, continued consumer spending and continued housing strength.

About the only negative aspect of the fourth quarter was that business investment in plant and equipment fell by 2.3% after rising by 1.6% in the third quarter. All major categories of business machinery and equipment investment declined.

A key argument for the Bank maintaining its 0.25% rate is that Canadian productivity is lagging quite seriously and the output gap is considerable. The falling business investment in plant and equipment supports that argument.

Nine university and private industry economists gathered together by the think tank C.D. Howe Institute unanimously call on the central bank to stand fast Tuesday. Eight of the nine would have it do the same in April. After that, they favor gradual rate hikes of 25 and 50 basis points.

These economists, like others surveyed, were concerned about “recent disappointing indicators in the United States and relative stagnation in Europe and Japan,” in contrast to continuing strong Canadian domestic indicators and strength in Asia.

Lawrence Kobescak

Lawrence Kobescak

Lawrence Kobescak, the creator behind OntarioMortgageSuperstore.com is a real estate sales representative, mortgage agent and real estate investor. OntarioMortgageSuperstore.com has reached over 240,000 Canadians since 2009. Lawrence has been quoted in the Globe & Mail and MortgageBrokerNews.ca.

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