Canada’s economic growth picks up

Canada reported sizzling
fourth-quarter economic growth, blasting away lingering doubts about recovery
from recession and putting pressure on the Bank of Canada to raise interest
rates sooner that it had planned.

Strong consumer spending, housing
demand and exports boosted gross domestic product by 5 per cent at an
annualized rate, Statistics Canada said. That was the strongest rate since 2000
and well above the 4.1 per cent market forecast.

Statscan revised its calculation of
growth in the third quarter to 0.9 per cent from 0.4 per cent previously.

The federal agency also reported a
rise in producer prices and raw materials prices in January from December due
to rising oil prices.

The Bank of Canada is still widely
expected to keep its key interest rate unchanged at 0.25 per cent in its policy
announcement today. But stronger-than-expected growth and inflation could
persuade it to raise rates earlier than it had planned, analysts said.

Bank of Canada Governor Mark Carney
has pledged to hold the rate at the current record low until the end of June,
but on the condition that inflation stays on the bank’s desired path.

Scotia Capital economist Derek Holt
now sees a strong risk of the bank abandoning the plan to hike rates in the
second quarter, though Scotia’s official forecast is for a first hike in the
third quarter.

Others expect monetary tightening
to begin in the second half of the year, but perhaps sooner than they had
forecast.

“At this point, I think the
bank does have scope to maintain its conditional commitment of holding the
overnight rate unchanged until the end of the second quarter, although
certainly the probability is rising that they may have to move in advance of
that,” said Paul Ferley, assistant chief economist at RBC.

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