–Concerns For Europe, U.S., Override Inflation Outlook
–Analysts See No Rate Hike, And Certainly No Rate Cut

By Courtney Tower

OTTAWA (MNI) – Every time for a year now that Bank of Canada
watchers have predicted change, they have had to stand back and watch
the BoC stand pat on its economy-stimulating 1.0% policy interest rate.
This time, they pretty well unanimously agree — no change again Tuesday
morning, because easier access to financing is still more
important than inflation concerns.

There will be no change on Tuesday, at the central bank’s
fixed-date setting of the target for the overnight rate, forecasters
agree. According to most, there will be no change, either, at the
following date, December 6, or, indeed, through most of 2012. Some go
further – no change until some time in 2013.

So what is left, for those who want to read the Bank of Canada’s
intentions and outlook, is to parse the words of the brief rate decision
statement Tuesday morning, and the full Monetary Policy Report the next
day, Wednesday.

In the MPR, the Bank at length gives its reading of the Canadian
and world economic situations now and expected. What most expect it to
say also is fairly obvious and is what the Bank’s leaders have said
before — the European debt crisis can spread to recession in the world,
and demand in the United States for Canada’s exports is going to remain
weak, so the domestic economy still needs help from interest rates.

Canadian inflation in September rose from August by a slight 0.1%
to 3.2% in the headline Consumer Price Index, and by a sharp 0.3% to
2.2% from 1.9% in the core index, which the Bank especially watches in
developing its rate policy. The Bank’s sole mandate is control of
inflation, and it has a 1%-to-3% target range for both overall inflation
and core. Despite the range, the actual inflation target is 2.0%.

Overall inflation has been as high as 3.7% this year (in March),
and throughout the year the Bank has maintained that this is temporary
and will revert to 2% over the next year. Until September, the core rate
of inflation has been just under 2% but now is over it, a surprise to
most forecasters who say that this elevated core rate, too, shall pass.

As European leaders struggle this week, still, with plans to save
Greece and other troubled member countries, and to recapitalize banks
whose lending to those countries has put them in enormous trouble,
financial analysts are saying Canada’s economy is not in the direct
line of fire but can suffer contagion effects through the global
financial system.

Already, notes Francis Fong, economist at TD Economics, Europe’s
debt crisis has led to nearly 20% declines in Canadian financial markets
between July and early October, and hit the Canadian dollar by more than
10 U.S. cents in the same period (it has lately recovered somewhat).

Fong is in close harmony with BOC Governor Mark Carney and Finance
Minister Jim Flaherty when he writes that “a key risk lies in whether or
not European leaders can contain the crisis.” Flaherty and Carney have
said as much, repeatedly, at recent G-20 meetings in Paris and before
that. Though direct exposure to Europe’s banks is limited, there is the
uncertainty and contagion effects that already have given rise to higher
interbank borrowing costs, now 11 basis points higher than in August,
Fong says.

Although inflation has increased somewhat in Canada, and recent
economic indicators have been fairly strong, such as a reduced
unemployment rate (to 7.1% from 7.3%), stronger manufacturing sales, a
modest improvement in exports, a housing market staying strong though
with the fever-bubble falling, the Bank of Canada sees Europe and weak
U.S. demand for Canadian exports as overriding concerns, analysts say.

The Senior Deputy Governor of the BOC, Tiff Macklem, probably set
the tone in a September 27 speech , when he said the Bank will be
“prudent” on any rate increases because economic recovery is slow and
threatened by Europe and weak U.S. recovery. In line with that, David
Tulk of TD Securities believes the Bank “will keep policy extremely
accommodative until financial market uncertainty fades and economic
growth proves to be durable.”

Emanuella Enenajor of CIBC World Markets addressed the
possibility, seen at this time by very few, that the Bank might cut its
rate in order to provide further stimulation. She writes that she sees
no possibility of a rate hike, and adds that “the hot inflation reading
certainly diminishes the likelihood of a rate cut in the near term.”

According to Krishen Rangasamy of the National Bank, “there are
just too many risk factors, primarily external, that threaten to derail
Canadian economic growth. We continue to expect the BOC to resume rate
hikes after the middle of next year.”

** Market News International Ottawa **

[TOPICS: M$C$$$,MAUDS$]