Interest rates not likely to be lowered

Pickup in economy puts rumours to rest

For a short while, it looked like the doves might overtake the hawks. Not anymore.

Speculation that Canada’s central bank could be convinced to drop interest rates — not raise them — is likely to fall off the radar, for now, thanks to signs of a sudden strong pickup in the economy.

The country’s output grew by an annualized 2.7% in the third quarter of this year. To put that in perspective, the last time the economy exceeded that pace was in the same quarter of 2011, when gross domestic product soared back by 6.2% after trade disruption caused by a tsunami in Japan began to ease.

Viewed another way, Canada is now just shy of matching the Julyto-September growth rate of 2.8% in the United States, the main destination of our goods and the country we’re dependent on to help stabilize our own recovery.

Economists, on average, had forecast a third-quarter GDP gain of around 2.5%.

Given the Bank of Canada had been looking for a much smaller 1.8% increase, policy-makers are expected to maintain their recent neutral position on the direction of borrowing cost for many more quarters. In particular, they will wait for more inflation and economic data to come in before moving rates one way or the other from the long-standing 1% benchmark.

So don’t expected Bank governor Stephen Poloz and his team to make any changes in Wednesday’s scheduled rate announcement.

“The key will be how much of the strength in Q3 will be reversed in Q4,” said Charles St-Arnaud, an economist at Nomura Securities in New York.

That’s because, regardless of the impressive third-quarter performance overall, there are temporary factors in the details released Friday by Statistics Canada.

As well, there are still lingering domestic concerns about household debt and the housing markets in general, along with possible global economic risks.

Statistics Canada also revised second-quarter annualized growth to 1.6% from 1.7%, while the firstquarter advance was adjusted to 2.3% from 2.2%.

Household spending — the key driver of the economy since the recession — was up 0.6% on a nonannualized basis between July and September, compared with a 0.9% increase in the second quarter that was led by a seasonal jump in car sales.

Overall business investment, which has been lagging since the 2008-09 downturn, rose by 0.6% in the third quarter, following a gain of 0.1% the previous quarter and a decline of 0.3% at the start of the year.