(OTTAWA, CNW Telbec) – The Bank of Canada today announced that it is raising its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent.

The global economic recovery is proceeding but is not yet self-sustaining. Greater emphasis on balance sheet repair by households, banks, and governments in a number of advanced economies is expected to temper the pace of global growth relative to the Bank’s outlook in its April Monetary Policy Report (MPR). While the policy response to the European sovereign debt crisis has reduced the risk of an adverse outcome and increased the prospect of sustainable long term growth, it is expected to slow the global recovery over the projection horizon. In the United States, private demand is picking up but remains uneven.

Economic activity in Canada is unfolding largely as expected, led by government and consumer spending. Housing activity is declining markedly from high levels, consistent with the Bank’s view that policy stimulus resulted in household expenditures being brought forward into late 2009 and early 2010. While employment growth has resumed, business investment appears to be held back by global uncertainties and has yet to recover from its sharp contraction during the recession.

The Bank expects the economic recovery in Canada to be more gradual than it had projected in its April MPR, with growth of 3.5 per cent in 2010, 2.9 per cent in 2011, and 2.2 per cent in 2012. This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada. The Bank anticipates that business investment and net exports will make a relatively larger contribution to growth.

Inflation in Canada has been broadly in line with the Bank’s April projection. While the Bank now expects the economy to return to full capacity at the end of 2011, two quarters later than had been anticipated in April, the underlying dynamics for inflation are little changed. Both total CPI and core inflation are expected to remain near 2 per cent throughout the projection period. The Bank will look through the transitory effects on inflation of changes to provincial indirect taxes.

Reflecting all of these factors, the Bank has decided to raise the target for the overnight rate to 3/4 per cent. This decision leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery.

Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

Information note:

A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 22 July 2010. The next scheduled date for announcing the overnight rate target is 8 September 2010.

By Courtney Tower 

OTTAWA (MNI) – Canada’s jobs strength Friday blew away all economists’ predictions but left them united in expecting an increase in the Bank of Canada’s policy rate next July 20, probably by 25 basis points.

“This strong report solidifies our call for the Bank of Canada to raise rates by 25 bps on July 20,” wrote analyst Benjamin Reitzes for BMO Nesbitt Burns shortly after Statistics Canada released its June employment report showing a surge of 93,200 jobs added in the month.

The June picture, the sixth consecutive month of jobs increases, “clearly shows that the Canadian recovery hasn’t stalled yet, despite signs of slowing momentum in the U.S. and other economies,” Reitzes wrote.

The June gains brought employment in Canada back to within only 15,000 of all the jobs lost since the labor market downturn began in the fall of 2008, and dropped the annual unemployment rate by 0.2% to 7.9%. This is the lowest rate since January of 2009, although it remains well above the 6.2% rate recorded in October, 2008.

The 93,000 new jobs in June surpassed analyst consensus predictions of a 20,000 gain in employment and the unemployment rate remaining at 8.1%. The new jobs were all in the services sector (+103,400) while goods industries lost 10,200 jobs, continuing the May loss of 7,700 and weak figures before that.

They were up 60,000 in the largest province, Ontario, perhaps in part reflecting the G-20 and G-8 meetings in Toronto and Huntsville, and +30,000 in the second largest province, Quebec. They were flat elsewhere and in actual decline in two of the four low-population Atlantic provinces.

“This recovery has continued to outpace the job market performance in the previous two major Canadian recessions by a large margin,” Diana Petramala at TD Economics said in a research note.

Petramala wrote what is a general opinion among economists, that the strong gains over the last three months probably reflect good economic growth over the last two quarters but that economic momentum is cooling off. She expects it to cool to a growth of 2.5% to 3.5% in the second half, “down from the 5-6% growth rates in the previous two quarters.”

However, Petramala adds, “employment recovery should continue in the coming months … at a more moderate pace of 15,000-25,000 new jobs per month.”

“The strong job trend and on-going decline in the unemployment rate argue for the Bank of Canada to move with its second rate hike of 25 basis points next week,” she said.

The jobs growth will support consumer spending “for some time,” wrote Gorica Djeric and Derk Holt, analysts at Scotia Capital Inc. The Bank of Canada must not have any choice “but to hike on July 20th with solid numbers like this,” they said.

However, the downside is that the Canadian economy remains functioning at low productivity, an economy “that remains biased to adding bodies versus getting more out of the already employed,” they added.

For Dawn Desjardins, assistant chief economist at Royal Bank of Canada, barring “another flare-up” in global financial markets, “we expect the Bank to gradually and steadily reduce the amount of policy accommodation.”

The Bank of Canada June 1 increased its rock-bottom 0.25% overnight rate target, where it had rested since April 2009, by 25 basis points to 0.50%. The BOC has indicated that more hikes are coming but has refused to indicate when and how soon, in light of the slow recovery elsewhere in the world and in Canada’s major market, the United States.

The Bank of Canada did the expected and raised its benchmark interest rate to 0.5 per cent on Tuesday, the first rate hike in nearly three years.

The bank moved its overnight lending rate 25 basis points higher, up from 0.25 per cent.

In doing so, Canada became the first G8 nation to raise rates after an aggressive round of cuts at the start of the recession in 2008, and after most developed economies showed signs of rebounding in 2009.

“The bank has decided to raise the target for the overnight rate to one-half per cent and to re-establish the normal functioning of the overnight market,” the bank said in a statement.

The rate has been frozen at 0.25 per cent since April 2009, when the bank made a “conditional commitment” to keep rates at such an extraordinary low as long as economic circumstances continued to warrant the shot in the arm of easy lending.

After recent reports showed Canada’s economy expanded at a 6.1 per cent annual pace in the first quarter, and created a record 109,000 jobs in April alone, the bank decided the time was right to act.

It’s the first time Mark Carney has opted to raise interest rates since he became the governor of the Bank of Canada more than two years ago.

There were concerns that the deteriorating economies of Europe and elsewhere might compel the bank to stand pat, but the bank clearly paid more attention to undeniable signs of local strength.

“The domestic case for higher rates simply overwhelms concerns about the international backdrop,” BMO chief economist Doug Porter said.

Further hikes expected

The bank’s next scheduled meeting to discuss rates is July 20. Given how long the rate has been so low, several small rate hikes in a row are expected moving forward. But in its policy statement Tuesday, the bank hinted that’s not necessarily the case.

“In most advanced economies, the recovery remains heavily dependent on monetary and fiscal stimulus,” the bank said in its statement.

“Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments,” it added.

CBC News

The Bank of Canada repeated Thursday that the Canadian economy is growing “somewhat more rapidly” than it expected in January.

The central bank, in its quarterly Monetary Policy Report, said the economy grew at the fastest pace in a decade at the start of the year, but has started to slow down — with the housing sector taking the lead.

Still, it said, higher interest rates would be “appropriate.”

In a news conference after the report’s release, bank governor Mark Carney, in response to a journalist’s question, said that he saw a proposed bank tax as a “distraction” from what should be the core agenda of financial reform.

The International Monetary Fund has proposed that banks be taxed on their borrowing, with the proceeds set aside for a bailout fund in times of economic crisis.

The proposal is expected to be a hot topic when finance minister and central bankers from the Group of 20 economic powers meet beginning on Friday in Washington.

Canada’s finance minister, Jim Flaherty, has said he opposes the idea.

Carney said it would be better to focus on requiring banks to increase the amount of share capital underpinning their debt, constrain their borrowing and come up with better ways to prevent runs on investment banks. Those runs happen when lenders stop providing money to banks because of the fear of bankruptcy.

Carney also came out in favour of contingency capital, or requiring that banks convert some of their debt into shares in a crisis, in order to constrain reckless borrowing by holding out the fear of losses by shareholders.

GDP likely rose 5.8%
The bank said gross domestic product likely increased by 5.8 per cent in the first three months of this year, fuelled by government stimulus and robust consumer spending. That would be the fastest rate of growth since the fourth quarter of 1999.

As well, the withdrawal of government stimulus, the high Canadian dollar and continued low demand in the United States will further drag the economy.

The bank repeated is prediction for 3.7 per cent growth this year, and forecast growth of 3.1 per cent in 2011 and 1.9 per cent in 2012.

The assessment comes two days after it ended a pledge to keep its benchmark interest rate at a record low 0.25 per cent until July.

The bank also updated its assumption on the level of the Canadian dollar, saying it will average 99 cents US through 2011, an increase from its January assumption of 96 cents.

Read more: http://www.cbc.ca/money/story/2010/04/22/boc-monetary-policy.html?ref=rss#ixzz0lqsjnJSb

The Canadian Press

OTTAWA-The Bank of Canada has issued its first unequivocal warning that higher interest rates are on their way, likely in about five weeks.

The central bank’s policy statement Tuesday surprised no-one by keeping the trend-setting interest rate at the record low 0.25 per cent for another announcement date, but it was clear about where it was heading next.

The bank’s governing council declared with the economy growing faster this year than thought, as well as inflation, there was no need to stay with its “conditional commitment” that it wouldn’t touch rates until the end of the second quarter, or after June 30.

“This unconventional policy provided considerable additional stimulus during a period of very weak economic conditions,” the council wrote.

“With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus.”

Hence, the council went on, it was withdrawing the conditional commitment.

That means the bank no longer believes it has a pledge to keep the policy rate at the so-called lower bound until July and sets the stage for a quarter-point or even half-point hike on June 1, the next announcement date.

Markets had already been planning for the central bank to move off emergency rates and in the past few weeks had begun hiking fixed, longer-term mortgage rates.

Once the bank does act, short-term rates and variable mortgages are also likely to be increased.

To drive home the point that the bank believes the financial crisis is over, it said it was also ending its emergency liquidity instrument — the purchase and resale agreements — that ensured money markets in Canada continued to function during the recession.

Several economists had been urging governor Mark Carney to move early on interest rates, but the vast majority felt the bank would lose credibility if it did so without a clear indication that inflation was getting out of control.

A small minority, however, argued that the economy was still too weak to warrant any increase in interest rates this year, and that doing could stall the recovery.

Economists also feared that an early signal from the bank, ahead of the U.S. Federal Reserve, would light a fire under the loonie and make life even more difficult for Canada’s battered manufacturing and export sector.

The bank gave at most a mixed signal that it believes inflation is getting out of hand, however, it said it was more lively than it had expected.

Nor is the economy in danger of overheating, judging by the bank’s new forecasts for 2010, 2011 and 2012.

The bank said the economy will advance 3.7 per cent this year, 3.1 per cent next year and 1.9 per cent in 2012. In January, its last forecast, it had growth at 2.9 this year, 3.5 next and gave no estimate for 2012.

In essence, the bank has moved up growth in the near term but left it relatively unchanged in the aggregate.

“This profile reflects stronger near-term global growth, very strong housing activity in Canada, and the bank’s assessment that policy stimulus resulted in more expenditures being brought forward,” it said.

“At the same time, the persistent strength of the Canadian dollar, Canada’s poor relative productivity performance and the low absolute level of U.S. demand will continue to act as significant drags on economic activity,” it added.

As for inflation, the council said core prices have been firmer than projected, but that they were expected to ease slightly in the second quarter of this year and remain near the bank’s two per cent target over the next two years.

Total headline inflation, which includes volatile items such as gasoline prices, was expected to be higher than two per cent this year, but returning to target in the second half of 2011.

The sum of the parts, the bank said, is that the economy will return to full capacity one-quarter sooner than it had previously thought in the second quarter of 2011.