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Pressure grows for Bank of Canada to hike rates

Monday, March 1st, 2010 | 9:39 pm

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Canwest News Service

Pressure on the Bank of Canada to move early on raising interest rates mounted Monday after data on fourth-quarter gross domestic product suggested the economy is roaring its way out of recession after recording the fastest pace of growth in nearly a decade.

The central bank could provide hints of a change Tuesday morning when it releases its latest statement on interest rates. Its plan for almost a year has been to conditionally keep its benchmark rate at 0.25% until July in an effort to pump up economic growth after the great recession.

Data from Statistics Canada suggest the emergency-level rates have worked their magic, perhaps faster and better than anticipated.

The economy expanded 5% in the final three months of 2009, blasting past market expectations for a 4% gain — and the bank’s own 3.3% 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 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% as opposed to the original 0.4% reading.

This comes on top of January inflation data that indicated price increases have moved closer to the central bank’s 2% target earlier than envisaged.

“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.

Yanick Desnoyers, assistant chief economist at National Bank Financial, said a rate hike could come as early as next month, when data might show the output gap — or the amount of slack in the economy — is narrowing faster than the central bank expected.

He added 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% in the quarter, the best showing since 2005. And that follows a 4.5% gain in the third quarter.

Sheryl King, chief economist and strategist at Bank of America/Merrill Lynch Canada, said she expects a rate hike in June, based on a belief the central bank will want to see through its conditional pledge for as long as possible.

Among the data points she said she found most encouraging was a 4% gain in real wage growth – defined as gains in household income excluding transfers from governments. The last time there was growth in this category was prior to the recession.

“This signals that risk taking and organic growth is coming back in Canada,” she said.

Of course, 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 raises the odds of a July rate rise but anything earlier than that remained remote. Analysts at TD Securities also shared a similar view.

Also, the data contained one key blemish – a 9.2% drop in machinery and equipment investment by Canadian companies, which does not bode well for efforts to boost abysmal productivity levels.

The GDP data attracted investors, as the Canadian dollar gained a full US1¢, to US96.01¢, on the possibility of an early rate hike.

Canadian growth should remain robust as the global recovery takes hold. Business surveys released Monday indicated manufacturers continue to lead the recovery, with factory activity expanding last month across Asia, the United States and Europe.

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