Calgary Alberta Mortgage and Real Estate News

Bank of Canada Governor David Dodge may keep interest rates unchanged for the longest stretch in five decades as inflation is tempered by a slump in U.S. demand for Canadian exports.Dodge, nearing the end of his seven-year term, will probably keep the benchmark rate at 4.25 percent tomorrow for the seventh-straight meeting. Some economists predict no interest rate changes before Dodge’s term ends in January, capping the longest pause since 1954.

“It’s almost an ideal world for the Bank of Canada,” said Doug Porter, an economist with BMO Capital Markets in Toronto. Core inflation, which discounts items such as fruit and gasoline, hovers near Dodge’s 2 percent target, and the economy’s “close to full capacity,” he said.

The world’s eighth-biggest economy has remained stable during global turmoil in part because Dodge hasn’t overreacted to events such as the fastest rise in the Canadian dollar since World War II. The currency’s surge prompted manufacturers such as jetmaker Bombardier Inc. to push for lower borrowing costs.

“Rates have been relatively stable given the massive shocks hitting the global economy,” said John Johnston, who helps manage about $2.6 billion in Toronto as chief strategist at the Harbour Group, a unit of Royal Bank of Canada. “It reflects a maturing of the bank’s monetary strategies.”

Lessons From 2003

Dodge, 63, may have learned from April 2003 when he tightened only to ease in July, underestimating the impact of slower U.S. auto imports and outbreaks of SARS and mad-cow diseases. The central banker left rates alone last May as investors called for an eighth-straight increase, and again at the end of 2006 as exporters lobbied for a reduction.

The bank’s six-member governing council, led by Dodge, deserves praise for “keeping the economy on a pretty good even keel,” said Dale Orr, Toronto-based managing director of Canadian research for Global Insight, a forecasting firm. “There is a reasonable amount of judgment involved, so you can give them credit.”

Since July, Dodge has said the risk of inflation veering from his target is balanced by stronger consumer spending and weaker U.S. demand for Canadian goods. Monthly data has so far borne this out, with core inflation between 2 percent and 2.4 percent, even with the jobless rate at a three-decade low.

If the bank keeps the overnight rate at 4.25 percent tomorrow, the pause would surpass a 2004-2005 stretch, and rival an 18-month run that ended in March 1973. Pausing through Jan. 31, when Dodge’s term ends, would extend it to 20 months, a streak not seen since the first governor, Graham Towers, retired in 1954.

All 22 economists in an April 19 Bloomberg survey forecast no rate change tomorrow.

Safest Thing

Dodge, who meets the bank’s board in June to discuss his future, will also keep rates unchanged through the first quarter of 2008, according to the median estimate of 11 economists surveyed by Bloomberg News April 4-9.

“The safest thing to do is nothing,” said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, who predicts no rate change this year. “There are two diverse and opposing sets of forces the bank has to deal with,” namely strong growth in oil-rich Alberta and slower growth in manufacturing-heavy Ontario and Quebec, he said.

The economy may not stay close to capacity. Some forecasters predict a strong dollar, trading close to a five- month high, and sluggish labor productivity will limit economic growth to 2.3 percent this year, according to a Bloomberg survey. That pace is half a percentage point below what the central bank says the economy can tolerate before inflation accelerates.

`Slowdown Contained’

Still, the slowdown has been limited to exports of lumber and other housing-related materials, said Jonathan Basile, an economist at Credit Suisse in New York. “Canada still has a lot of natural resources that will be in demand for a long time,” he said.

Some investors are betting any rate move this year would be an increase. They point to the 6.1 percent jobless rate and February’s core inflation rate of 2.4 percent, a four-year high. The yield on the December bankers’ acceptance contract, tied in part to the central bank rate, rose to 4.42 percent April 19, from 3.97 percent March 7 on the Montreal Exchange.

Dodge, who hasn’t indicated whether he’d seek a second term, says he isn’t focused on the long pause in rate moves.

“What we are trying to do, always, is to have monetary conditions such that we will hit our inflation targets,” Dodge said in an April 13 interview in Washington during a meeting of the Group of Seven industrialized nations. “What it reflects is exactly what we’ve said, that we think that they are appropriate to do that.”

The Canadian dollar extended its recent charge to close at its highest level in 4-1/2 months against the U.S. currency on Thursday, helped partly by a rise in oil prices and foreign interest in Canadian companies.Domestic bond prices turned lower alongside the bigger U.S. treasuries market, but the move was limited ahead of Canadian trade data on Friday and more key data next week.

The Canadian dollar closed at C$1.1345 to the U.S. dollar, or 88.14 U.S. cents, up from C$1.1398, or 87.73 U.S. cents, at Wednesday’s close.

The resource-linked currency, which has recorded sharp gains all week to return to levels not seen since last November, took advantage of a slew of Canadian dollar-positive events, most notably a 3 percent jump in oil prices.

“It’s the rising energy prices … continued news on the M&A activity which is bullish for the Canadian dollar and the U.S. dollar itself was a little weaker,” said Carlos Leitao, chief economist at Laurentian Bank of Canada.

“The trend right now is very strong and the (Canadian) dollar doesn’t seem to want to come down so it’s going up.”

The latest report of potential foreign interest in Canada involved steelmaker Ipsco Inc. (IPS.TO: Quote), which has a market capitalization of about C$7.8 billion, and said on Thursday it was in discussions that could lead to a sale of the company.

The Canadian dollar had little reaction to a report showing new housing prices rose 0.5 percent in February from January, as analysts said last week’s strong jobs data and signs of building inflation were still driving the currency.

Recent strong data has quieted previous talk of Bank of Canada interest rate cuts, and prompted analysts to start speculating about the timing of possible rate hikes, which would raise the yield on Canadian investments and boost the currency.

In a speech in Montreal, Bank of Canada Deputy Governor Sheryl Kennedy did not talk about the country’s economic outlook or the central bank’s upcoming rate decision.

The Canadian dollar jumped
against the greenback on Thursday, reaching a 3-1/2 month high,
after a surprisingly powerful March employment report suggested
to some that the Bank of Canada will eventually hike interest
rates.

 The currency closed at C$1.1506 to the U.S. dollar, or 86.91 U.S. cents, up from C$1.1592, or 86.26 U.S. cents, at Wednesday’s close.
 The Canadian economy added a whopping 54,900 jobs in March, blowing past forecasts for a 15,000-job gain, while the unemployment rate stayed unchanged at a 31-year low of 6.1 percent.
 The stronger than expected report was the latest in a string of robust monthly jobs reports, and pushed the currency as high as C$1.1487, or 87.05 U.S. cents, a level it has not touched since late December. The Canadian unit eased slightly in the afternoon, as market participants drifted away for the Friday Easter holiday.
 ”The employment rate, arguably the best measure of labor-market strength, is at a record high,” at 63.5 percent, said Warren Lovely, senior economist with CIBC World Markets in Toronto.
 ”Tightness in the labor market is going to prevent the Bank of Canada from entertaining easier (monetary) policy and the Canadian dollar is reacting as you might expect, it’s getting a bit of a bid,” Lovely said.
 The Ivey Purchasing Managers Index, also released on Friday, painted an upbeat picture as well. It rose to 67.3 in March, the highest result since last June. An index reading above 50 indicates an increase in purchasing activity.
 Market talk continued to shift away from expectations of interest rate cuts and towards the timing of a possible hike, which would raise yields on Canadian investments and boost the Canadian dollar.
 However, analysts expect the central bank to hold rates steady at its next decision date of April 24.
 Canadian markets will be closed on Friday, when the U.S. March non-farm payrolls data is due for release. The market is anticipating about 120,000 new jobs. U.S. financial markets will close early, and thinly staffed desks often exaggerate price moves.
 BONDS EDGE LOWER
 Bond prices retreated on the jobs data, even though moderate wage growth suggested to some that the Bank of Canada will not have to raise rates in the near future to stave off inflation. U.S. treasuries also moved lower.
 The Bank of Canada’s overnight rate stands at 4.25 percent.
 The two-year bond fell 11 Canadian cents to C$99.42 to yield 4.033 percent, while the 10-year bond fell 23 Canadian cents to C$98.93 to yield 4.142 percent.
 The yield spread between the two-year and 10-year bond moved to 10.9 basis points from 13.3 at the previous close.
 The 30-year bond slid 40 Canadian cents to C$124.30 to yield 4.208 percent. In the United States, the 30-year treasury yielded 4.876 percent.
 The three-month when-issued T-bill yielded 4.18 percent, unchanged from the previous close.