Canada’s economy produced a full month of better-than-expected economic data, helping to crank up inflationary pressure beyond expectations in February and put the Bank of Canada in the uncomfortable position of possibly breaking its pledge on interest rates.

Following the release of key inflation and retail sales data Friday from Statistics Canada, at least one Bay Street economics team revised upward its growth forecast for the first quarter by a full percentage point, and indicated more positive revisions could be in the offing.

The data, however, failed to power the Canadian dollar’s march to parity with its U.S. counterpart — although the loonie nonetheless made big gains Friday against the world’s other major currencies, as it set a three-decade high against the British pound and a 28-month high against the euro.

In all, Friday’s developments suggest the Canadian economy is roaring back at a pace that might be setting off warning bells at the Bank of Canada, which had conditionally pledged to keep its benchmark rate at 0.25 per cent until July to get the economy back on track.

“There is simply no mistaking that growth and inflation have more underlying power than even the most strident optimist would have believed just a few short months ago,”

said Douglas Porter, deputy chief economist at BMO Capital Markets, which accordingly upgraded its first-quarter GDP forecast for Canada Friday to 4.7 per cent expansion, from its previous 3.7 per cent expectation.
Retail sales was the last piece of data to emerge from January, and with that Porter said Canada produced an “unbelievable” full month of better-than-anticipated economic data. For the record, retail sales jumped 0.7 per cent in January, above the 0.6 per cent consensus.

However, when autos are excluded, sales surged 1.8 per cent, or the biggest one-month gain since late 2007. This was due, in part, to a 7.4 per cent increase in sales at outdoor supply stores, as households rushed to buy building supplies before the one-time federal home renovation tax expired on Feb. 1.

Meanwhile, all eyes were on February inflation data, which proved to be equally robust, with the core rate — watched closely by the Bank of Canada — posting a surge beyond the key two per cent threshold.

Statistics Canada core inflation, which strips out volatile-priced items such as food and energy, advanced 2.1 per cent year-over-year in February, whereas analysts anticipated a 1.7 per cent year-over-year increase.

The Bank of Canada’s last economic outlook, tabled in January, envisaged core inflation to average 1.6 per cent in the first quarter and 1.7 per cent in the second quarter. The central bank’s pledge on rates was conditional on its inflation outlook unfolding as anticipated.

“The Bank of Canada has all the evidence it needs to convince itself it doesn’t need emergency policy measures anymore, I think (the data) tells you the economy is firing on a lot of cylinders.
I continue to believe the bank will wait until July but they must be getting incredibly uncomfortable with that long of a wait”

said Andrew Pyle, wealth adviser and markets commentator with ScotiaMcLeod.

The inflation data come with a caveat, as the Vancouver Olympics drove up prices in some key areas, notably travel and lodging. Nevertheless, Porter said inflation would still be above the central bank’s forecast even if the Olympic-related numbers were adjusted.

Mark Carney, the Bank of Canada governor, might shed further light on the central bank’s outlook in a speech in Ottawa this coming Wednesday.

There was anticipation that robust inflation data could finally propel the loonie to parity with the U.S. dollar. That was not the case, however, as traders cashed in on profits and sought safety in U.S. dollars, largely due to uncertainty as to how the eurozone would deal with Greek debt problems, and an unexpected rate hike in India. The dollar closed Friday at 98.39 cents U.S., down slightly from the previous session.

“The market remains unwilling to take the final plunge (toward parity) without the support of improving global sentiment,” said Matthew Strauss, senior currency strategists at RBC Capital Markets.

Source:
edmontonjournal.com

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Tags: Economy, Financial, interest rates, recovery, Statistics