Central bank expected to stand pat on rates

(December 3, 2004) Just a few months back, economists were convinced the Bank of Canada would raise interest rates once more before the end of the year. But things have changed, and now the consensus is that the central bank will hold the line on its key overnight lending rate, currently at 2.5%.

Today’s poor unemployment report is likely to cement the Bank of Canada’s decision to keep rates unchanged next week, says BMO Nesbitt Burns chief economist Sherry Cooper.

“While the employment figures are always volatile, there is some clear evidence that the surging Canadian dollar is finally beginning to make an impression on key export sectors,” Cooper added.

The unemployment rate rose to 7.3% in November, as 18,000 jobs were lost in manufacturing. The sector has lost more than 50,000 jobs since July, partly due to the strengthening loonie, which makes exports more expensive.

Today’s disappointing employment data provide the Bank of Canada with all of the justification it needs to leave rates on hold at next Tuesday’s fixed announcement date, agreed TD economist Craig Alexander. “Markets were looking for employment to rise by 25,000 in November, but in fact, a mere 4,600 net new jobs were created.”

Canadian Labour Congress president Ken Georgetti says labour economists met with the Bank of Canada last week and “explained clearly that hiking interest rates would be the wrong thing to do.”

“We hope and expect that this will be recognized by the Bank of Canada,” he said.

The C.D. Howe Institute’s Monetary Policy Council is also recommending that the central bank keep interest rates unchanged. Eight of the nine panelists agreed the rate should stay at 2.5%, not only next week, but also at the bank’s next scheduled interest rate announcement in January.

“The recent appreciation in the Canadian dollar, and in particular its continued strength even as commodity prices and export demand have flagged, figured prominently in the reasoning of many members,” said institute vice-president William Robson. “The possibility that the dollar has overshot the level supported by fundamentals, and the political and economic uncertainties surrounding near-term movements in the U.S. dollar versus other currencies, inclined the council to recommend that the Bank keep its powder dry.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com