Central bank disappoints some
INTEREST RATE Most lending rates up a quarter point Economists wanted tougher language
The Bank of Canada disappointed some in financial markets yesterday, despite raising its trend-setting interest rate a quarter point for the third time in three months and promising more to come. The markets overwhelmingly expected the central bank would increase its overnight rate at least to 3.25 per cent, as it did yesterday morning. But observers felt the tone of the accompanying statement wasn’t as tough as it could have been, considering reports last week that showed the economy is in good shape. Some had even pondered the possibility of a half- point increase. The central bank “wasn’t as firm as the market was hoping for,” said Steve Butler of Scotia Capital. “ Going back to Friday’s employment data, there was the risk they may have been more aggressive.”
Statistics Canada reported Friday that the jobless rate for November fell to 6.4 per cent, a 31year low, while average hourly wage increases were running at 3.9 per cent, enough to raise concerns that higher energy costs could soon push up the overall inflation rate. Moreover, the economy expanded at an annual rate of 3.6 per cent in the third quarter. The central bank acknowledged in its news release that the economy has recently performed better than expected. But the bank emphasized its forecasts for growth and inflation remain unchanged.
“ In line with the outlook, some further reduction in monetary stimulus will be required to maintain a balance between aggregate supply and demand over the next four to six quarters and keep inflation on target.” Some big banks responded to yesterday’s decision by boosting their prime lending rates to 5 per cent and raising variablerate mortgages by a quarter point. The Bank of Montreal lifted its one- year closed mortgage rate to 4.55 per cent, from 4.4 per cent.
The Bank of Canada next sets interest- rate policy on Jan. 24. Forecasters’ expectations for the overnight rate range from 3.75 per cent to 4.5 per cent. Mark Chandler, senior financial markets economist at the Bank of Nova Scotia, is calling for a 4 per cent overnight rate by the spring. Yesterday’s statement was perceived as slightly dovish, but the central bank is merely trying to give itself some flexibility for the months ahead, he added.
“ I don’t think the bank wants to pre- commit to a string of rate increases without seeing the data as it rolls in.” The Canadian dollar had gained a quarter of a cent overnight, partly fuelled by speculation the central bank would issue a stronger statement. But the currency fell nearly half a cent after the release of the decision before reclaiming some of the lost ground. The dollar closed at 86.42 cents ( U. S.), up 0.01 of a cent. While yesterday’s statement poured cold water on speculation of a half- point hike somewhere down the road, the bank can’t afford to ignore looming inflation pressures, said Derek Holt, assistant chief economist at the Royal Bank of Canada.
“ Tight labour markets are likely to continue feeding accelerating wage gains, while infrastructure shortfalls and years of underinvestment, particularly in the manufacturing sector, represent production bottlenecks,” Holt said.