Mann at Work

Jul 11 2007 6:41AM | Permalink | Email this | Comments (0) |
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Very few rate-watchers were surprised Tuesday when the Bank of Canada raised its target for the overnight rate by one-quarter of one percentage point to 4.5%. The corresponding Bank Rate is now 4.75%. As for the future, the Bank said that “some modest further increase in the overnight rate may be required to bring inflation back to the target over the medium term.”

Meanwhile, contrary to expectations, Canadian housing starts are still quite strong. While the seasonally adjusted annual rate of housing starts was 225,500 units in June, down from 235,200 units in May, the fact that CMHC estimated May’s starts at 229,700 units, then revised the figure upward to to 235,200 units later in the month, means that overall, Canadian housing starts are still quite strong.

Bank of Canada raises target overnight rate
Economic growth and inflation in Canada in the first half of this year were stronger than the April Monetary Policy Report (MPR) predicted. The Canadian economy is now projected to grow by 2.5% in 2007 and to grow somewhat more slowly in 2008 and 2009.

The projections for inflation have also changed since the April MPR. Inflation is now projected to be slightly higher and more persistent; however, as excess demand diminishes, total CPI and core inflation should decline to 2% by early 2009.

The main upside risk to the Bank’s inflation projection is stronger-than-expected household demand. The main downside risks are the higher Canadian dollar and the ongoing adjustment in the U.S. housing sector. When taken in the context of the Bank's newest projections, these risks appear to be roughly balanced.

Canadian housing starts fall slightly in June
The seasonally adjusted annual rates* of housing starts in June 2007 versus May 2007 were as follows:

• Urban starts decreased 4.8% to 192,600 units;
• Urban singles were up 2.1% to 92,200 units;
• Urban multiples decreased 10.4% to 100,400 units;
• Rural starts were estimated at 32,900 units.

Actual starts, rural and urban areas combined, were down an estimated 3.8% in the first half of 2007, compared to the same period in 2006.

*All starts figures in this section, other than actual starts, are seasonally adjusted annual rates (SAAR).