Central bank sticks with growth forecast

(July 22, 2004) The Canadian economy likely grew by about 3.25% in the first half of the year, the Bank of Canada said today in its latest monetary policy update. That’s slightly higher than the central bank projected in April, when it estimated growth of 2.75%.

The bank credits stronger foreign and domestic demand for Canadian products for the 50-basis point increase. The central bank’s economic forecast for the second half of 2004 and the first half of 2005 remains unchanged at 3.5%.

“Solid growth in consumer spending should be sustained by advances in real income,” the report says. “Business investment should continue to benefit from strong global growth, high commodity prices, favourable financial conditions and lower prices for imported machinery and equipment.”

The central bank also raised its short-term inflation projections due to higher oil prices. However, core inflation is expected to be little changed, hovering around 1.5% for the remainder of 2004 before rising to around 2% by the end of 2005, well within the bank’s target range.

The report hints at higher interest rates, noting that “monetary stimulus must be removed to avoid a buildup of inflation pressures. Indeed, market interest rates, in Canada and elsewhere, incorporate expectations of such adjustment to policy interest rates.”

Bank of Canada governor David Dodge wouldn’t speculate on when rates might move, but analysts predict the central bank will gradually begin raising its key overnight lending rate in the fall.

Also today, the Conference Board of Canada released a report on the global economy, putting China at the top of the list with 8.6% growth in 2004, compared to the world average of 4%.

Looking ahead to next year, economic growth around the world will be “slightly restrained” due to anticipated higher interest rates, says principal research associate Kip Beckman.

“Although rising interest rates are rarely viewed in a positive light, they represent an inevitable consequence of the growing strength of the world economy,” he says.

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