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Wednesday, December 22, 2010

Canada CPI and Retails Data Give Central Bank Scope to Hold Rates Steady

Canada’s consumer prices advanced less than forecast last month and the volume of retail sales fell in October, giving the Bank of Canada scope to hold interest rates steady until at least the second quarter of 2011.

The consumer price index rose 2 percent in November following a 2.4 percent gain the previous month and October’s retail sales fell 0.2 percent once the effect of price changes is removed, Statistics Canada said today. The core inflation rate, which excludes eight volatile items such as gasoline and which is watched closely by the Bank of Canada, rose 1.4 percent, the slowest pace since March 2008, the agency said.

“The conditions are in place for the Bank of Canada to maintain the status quo for several more months,” said Benoit Durocher, an economist with Mouvement Desjardins, Quebec’s largest credit union. Durocher predicts the central bank won’t begin raising its overnight target rate before July.
The central bank, which aims to keep inflation close to its 2 percent target, said in October inflation will average 2.1 percent in the October-December period, and core prices will average 1.6 percent. The bank kept its key lending rate at 1 percent Oct. 19 after three prior increases, and said inflation pressures will be moderated by “slack” in the economy that may persist until the end of 2012.
The inflation report “washes away any concern that may have developed in October,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto. November’s report was the “mirror image” of the previous one and “brings us back to square one, if not further,” in removing pressure on the central bank to raise rates.
Porter predicts the central bank will begin raising rates in May.

‘Considerable’ Stimulus
Bank of Canada Governor Mark Carney reiterated last week that the level of Canada’s policy interest rate “leaves considerable monetary stimulus in place.”
Economists forecast the annual inflation rate would be 2.2 percent, according to the median estimate in a Bloomberg News survey, while the core rate was forecast to be 1.6 percent.
Retail sales increased in October for a fifth straight month due to higher gasoline prices, Statistics Canada said in a separate report. Sales advanced 0.8 percent to a seasonally adjusted C$36.6 billion, Statistics Canada said. Leading the gain was a 7.4 percent increase at gasoline stations that was driven by higher pump prices, the report said.

The drop in sales volumes will subtract from October’s growth, making it likely that Canada’s economy will expand at an annual pace below 2 percent in the fourth quarter, Desjardins’ Durocher said. Statistics Canada will report October GDP data Dec. 23 at 8:30 a.m. New York time, and economists forecast a gain of 0.3 percent, based on the median of 21 estimates.

Currency Weakens
The Canadian currency depreciated 0.1 percent to C$1.0174 per U.S. dollar at 4 p.m. in Toronto from C$1.0168 yesterday. One Canadian dollar buys 98.29 U.S. cents.
The next Bank of Canada interest rate decision is Jan. 18. Investors have priced in an 11 percent chance that Carney will raise his benchmark policy rate to 1.25 percent from 1 percent, according to a Bloomberg calculation based on overnight index swaps trading.
Energy price increases slowed in November, gaining 6.7 percent on the year, compared with a 9.1 percent rise in October. Gasoline prices led the overall gain, rising 7.2 percent in November from a year earlier, Statistics Canada said. Electricity prices advanced 5.9 percent, slower than October’s 8.1 percent gain.

Food, Clothing
Food prices rose 1.5 percent in November after a 2.2 percent gain in October, while clothing and footwear were 3.2 percent cheaper than a year ago, the agency said in its report.
The inflation report “certainly provides the Bank of Canada with some increased elbow room on the policy front,” Stewart Hall, an economist with HSBC Holdings Plc in Toronto, said in a note to clients.
The Bank of Canada said in October that sales tax increases in Ontario, British Columbia and Nova Scotia will boost inflation by 0.7 percentage point from July to June 2011.

On a monthly basis, overall consumer prices rose 0.1 percent in November after a 0.4 percent gain the previous month. The core rate was unchanged in November, after a 0.4 percent increase in October that was the fastest since February. Economists predicted that monthly prices would rise 0.3 percent, and the core rate would increase 0.2 percent.

To contact the reporter on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net.