Bank of Canada Interest Rate Decision - January 17, 2012
For the 11th consecutive meeting, the Bank of Canada opted to hold its target overnight rate at 1 per cent. In the statement accompanying the decision, the Bank noted that the global economic outlook is deteriorating, largely due to an expected deep and prolonged recession in Europe. While the Bank expects the Euro-crisis to be contained, it will impact the Canadian economy this year, and the Bank is forecasting GDP growth of just 2 per cent in 2012. On inflation, the Bank anticipates that both total and core inflation will moderate this year before rising to 2 per cent by the third quarter of 2013.
Our view of the economy is largely in-line with the Bank of Canada, indeed our forecast for economic growth is almost identical. The Canadian economy is likely to face a number of headwinds in 2012, both externally from the Euro-debt saga and an uncertain US economy, and internally as traditional sources of growth begin to fade. Indeed, it is difficult to see where economic growth will come from in 2012 if, as expected, Canadian consumption slows , Governments begin address fiscal gaps and residential construction moderates. This leaves private business investment to drive the economy, but given a murky demand outlook, it is far from certain that businesses will be in the mood to take on significant new projects. Given the extent of downside risks to the Canadian economy, it is unlikely that the Bank of Canada will move on interest rates in 2012. Moreover, long-term rates will remain at historically low levels until confidence is restored in the sovereign debt of Europe.
Canadian Manufacturing and US Housing Starts – January 19, 2012
Canadian manufacturing sales bounced 2 per cent higher in November, following an 0.8 per cent monthly decline in October. The gains were driven by higher sales in the petroleum and coal products industries along with strength in the auto sector. Total manufacturing sales were 1.7 per cent higher in volume terms. Higher sales were reported in 80 per cent of the manufacturing sectors surveyed. Sales by BC manufacturing firms grew 0.9 per cent month over month in November and were almost 6 per cent higher than in November 2010.
South of the border, US housing starts (a key bellwether for BC’s forestry sector) fell 4.1 per cent in December, coming in at a seasonally adjusted annual rate of 657,000 units. However, the pace of housing starts in the fourth quarter of 2011 represented a post-recession high, a strong signal that US home construction should continue to improve in 2012.
Canadian Inflation - January 20, 2012
Canadian CPI inflation registered 2.3 per cent (year-over-year) in December, a 0.6 point decline from November. The drop in inflation last month was largely due to slow growth in prices for gasoline, food products, and automobiles. The Bank of Canada’s core inflation measure, which excludes food and energy prices, rose at a rate of 1.9 per cent in December from 2.1 per cent in November. Consumer prices in BC were just 1.7 per cent in December (year-over-year).
Slack in the Canadian economy and moderating global commodity prices are likely to ensure that both core and total CPI inflation remain close to or below the Bank of Canada’s 2 per cent inflation target over the next 12 months. Without any serious inflationary pressure, the Bank of Canada will opt to keep the current considerable level of monetary stimulus in place for the foreseeable future.
For more information, please contact: Gino Pezzani
