For the second consecutive time Bank of Canada Monetary Policy Committee cut key interest rate by 25 basis points to 4.00%. It has been the lowest level since March 2006. Central bank’s press release was consecrated to the troubles of the US economy. At the same time it was underlined, that the pace of Canadian economy growth coincided with the level anticipated by BOC, which was published in January monetary policy report.
According to this report, among the factors contributing to the economic growth in Canada the Committee members marked domestic demand, which is soaring thanks to high commodity prices and low unemployment. Record high oil prices and increasing production capacity contributed to the increase of investments in oil and natural gas drilling and refinery machinery. Personal expenditure growth came out from ongoing gains in both real disposable income and household net worth. The main sources of economic growth pace deceleration in Canada are the strengthening of Canadian dollar and the US residential investments, as long as Canadian export of lumber and other building materials is decreasing rapidly.
Central bank’s experts are anticipating 11% slippage of the US real residential investments in 2008. It may markedly reduce the building materials export from Canada. On the basis of the above mentioned BOC is expecting GDP growth by 1.8% in 2008, compared with 2.3% in 2007 (table 1).
Labor productivity growth in the private sector rose at 0.9% in last year, which was lower by 0.3% than the average growth over the 2004-06 period. It is related to several structural changes in economy. In particular, labor and capital have been moving towards oil, natural gas and metals production. Certainly the labor and capital could be somewhat less productive during such transition period. Due to moderated growth rate of productivity and increase of economy in the whole the unemployment dropped down to 33 year low.
In spite of oil, gold and wheat uptrend the Committee members expected notable deceleration of both core and headline CPI rates. The lowest inflation rates are forecasted in the second quarter of 2008 at 1.4%. At the same period CPI rate, excluding energy and food, will be 1.3%. However, an increase of the CPI rate is anticipated to 2% in 2009, which is significantly lower than the previous level.
In the medium term the potential of economic growth of Canada is limited mainly due to accumulated troubles of the US Subprime and Alt-A mortgage backed securities. In other words, the crisis in the US real estate market is deepening, which will have a significant negative impact on Canadian economy. On the other hand the negative impact of strong Canadian dollar on export, which is one of the most important component of Canada’s GDP, has been more essential. The strong national currency positions, due to high commodity prices and narrowed spread between the US dollar and Canadian dollar interest rates will even more reduce economic growth perspectives of the latter. Finally the oil, gold and wheat, which pushed up the economy of this country, may fall in price, as the US economy is weakening, while high energy prices mostly have a political character.
In this connection, we believe that Bank of Canada is more likely to cut overnight interest rates by 25 basis points to 3.75% on March 4.
CANADA ECONOMIC INDICATORS
Table 1
|
Bank of Canada projections
|
2007
|
2008
|
|
GDP
|
2.5
|
2.6
|
|
Final domestic demand
|
3.4
|
3.1
|
|
- Personal consumption
|
2.1
|
1.9
|
|
- Government expenditure
|
0.6
|
0.7
|
|
- Fixed capital formation
|
0.6
|
0.6
|
|
Net export
|
-0.8
|
-0.6
|
|
- Export
|
0.6
|
0.9
|
|
- Import
|
-1.4
|
-1.5
|
|
Inventories
|
0.1
|
0.1
|
Source: Bank of Canada
