Interest rates will likely hold
the Bank of Canada this coming week almost certainly passes on another opportunity to raise interest rates.And that’s despite expectations that the annual inflation rate last month bounced back up above the central bank’s two-per-cent target.
The Bank of Canada’s interest rate announcement on Tuesday, its latest monetary policy report Thursday, and Statistics Canada’s September inflation report Friday are the major domestic economic reports this week.
While many economists still suspect that the next move by the Bank of Canada will be to raise rates further, they say it certainly won’t be this week, and may not be until next year.
Analysts expect the central bank will keep its trend-setting overnight target rate steady at 4.5 per cent, the second time it will have passed on an opportunity to carry through on last summer’s threat to raise rates further.
And that’s good news for indebted consumers, as changes in that key rate are almost always matched by changes in the chartered bank’s blue-chip prime rate to which the rates on consumer and business loan and variable rate mortgages are tied.
“While the recent employment and housing data have been strong and the turmoil in financial markets appears to be abating, the Canadian dollar is up about a whopping eight cents since the bank’s last meeting, and house price gains have been moderating,” UBS Securities Canada said in explaining why it expects no change in rates this week.
CIBC Worlds Markets economist Avery Shenfeld was even more adamant about why the central bank won’t raise rates.
“It can’t even think about cutting rates with a 5.9-per-cent unemployment rate, and a hike seems equally unthinkable given uncertainties over the U.S., a soaring Canadian dollar, and a crunch in commercial paper markets,” Shenfeld said.
Bank of Canada governor David Dodge will give his own explanation of what it did or didn’t do with rates and why when it presents its Monetary Policy Report which will also provide an update the bank’s expectations for inflation, the state of the domestic credit crunch, as well as its outlook for the Canadian, U.S. and global economies.
UBS, meanwhile, expects that Statistics Canada will report on Friday that the annual inflation rate bounced back up to 2.4 per cent last month from 1.9 per cent in August, which, under normal circumstances, would give the central bank justification to raise rates further.
But UBS also expects core inflation, which excludes volatile energy and food prices, and which the central bank monitors for underlying inflation trends, to ease to 1.9 per cent, a notch below the bank’s two per cent target, and down from 2.2 per cent in August.
Meanwhile, UBS sees mixed results coming from two other Canadian economic reports for the month of August, a 0.7-per-cent decline in factory shipments following a 2.3-per-cent gain in July but a three-per-cent rebound in new motor vehicle sales following three months of declines.
Americans and most of the rest of the world, meanwhile, will focus this week on speeches by U.S. Federal Reserve chairman Ben Bernanke on Monday in New York and then again on Friday in St. Louis, the latter being on the issue of conducting monetary policy in times of financial and economic uncertainty.
“And there’s no shortage of uncertainty these days,” CIBC’s Shenfeld noted.
Some of the uncertainty surrounding how the U.S. economy has responded to the mortgage market meltdown and ensuing credit crunch may be reduced with a string of reports from south of the border on September’s consumer price inflation and housing starts on Wednesday, the U.S. leading economic indicator on Thursday, and industrial production and business capacity utilization on Tuesday.
One uncertainty that will be cleared up is who is this year’s winner of the Nobel prize for economics, which will be announced Monday in Stockholm.