The economic picture

Recent Canadian growth and inflation figures have surprised analysts to the upside, which has sparked speculation the Bank of Canada (BOC) may need to hike interest rates later this year. As of June 1, the BOC overnight rate stood at 4.25 percent. The BOC met on May 29, but as expected, held monetary policy steady — although it hinted rates might be raised later to ward off inflationary pressures. Looking ahead, some analysts believe the BOC could pull the trigger on a 0.25 basis-point rate hike at its July 10 meeting.

Most analysts see a total of two 0.25 basis point hikes before yearend for Canada. John Shin, economist at Lehman Brothers, says the growth picture has been improving over the past couple of quarters. His firm is forecasting a 2.4 percent overall gross domestic product (GDP) reading for Canada in 2007. Economic growth in Canada softened in the second half of 2006 with 2.0 percent and 1.4 percent GDP readings for the third and fourth quarters, respectively.

The recently strong economic data has also helped underpin the recent uptrend in the Canadian currency. The mid-May release of the March Canadian retail sales data surprised most market watchers by jumping 1.9 percent month-over-month, more than doubling the estimated 0.8-percent increase. “That was a strong number,” notes Michael Woolfolk, senior currency strategist at The Bank of New York. He says that gain translated into a 6.5 percent year-over-year increase.

“In the fourth quarter of 2006 and the first quarter of 2007, the economy of Canada outperformed the U.S.,” Woolfolk adds. Also adding to the overall luster of Canada’s fundamental outlook is its trade and budget surpluses — the only country in the G-7 that has both. The employment picture is also bright in Canada, with recent data touching 30-year lows. However, both the stronger growth and labor markets have added pressure to inflation worries. Core consumer price index (CPI) data for April surged to 2.5 percent year-over-year, which is above the BOC’s 2.0-percent target.