Canadian Economy Cooling Raises Odds of Central Bank Rate Pause

Employment and housing figures released today confirm that Canada’s economy is cooling faster than the central bank had forecast, indicating the Bank of Canada will refrain from raising interest rates until next year, economists said.

Employment in Canada unexpectedly fell by 6,600 jobs in September, the second drop in the past nine months, Statistics Canada said. The average monthly employment gain was 6,600 in the third quarter, down from 75,530 in the April to June period. Housing starts slowed to an annual pace of 186,400 units from 189,300 in August, Canada Mortgage and Housing Corp. said. In the U.S., employers fired 95,000 workers in September, the Labor Department said in Washington.

“We shifted down one gear,” said Sebastien Lavoie, an economist with Laurentian Banks Securities in Montreal who was one of only two economists in a Bloomberg survey to estimate Canada would not add jobs in September. Today’s data “only solidify the increasingly popular view” that the central bank won’t move at its Oct. 19 meeting.

Bank of Canada Governor Mark Carney, who has raised the bank’s key lending rate three times this year to 1 percent, has already signaled he’ll apply “caution” in the face of a “more gradual” recovery in Canada and signs the U.S. Federal Reserve may ease policy. The bank is likely to remain on hold until May, said Benoit Durocher, an economist with Mouvement Desjardins, Quebec’s largest credit union, in Montreal.

“There’s no way to ignore the fact that growth in Canada is slowing,” Durocher said. “The results for employment and housing starts have confirmed that.”

Lower Outlook

Durocher estimates the economy grew at a 1 percent annual pace in the third quarter, compared with Carney’s July prediction of 2.8 percent. Durocher said he expects the central bank to reduce its outlook considerably in its monetary policy report on Oct. 20.

The yield on December 2010 bankers’ acceptances contract, the most actively traded contract, fell 1 basis point to 1.30 percent at 1:29 p.m. in Toronto, the lowest since Sept. 8, when the central bank last raised interest rates. The contracts have settled an average of about 20 basis points above the central bank’s overnight target since 1992, Bloomberg data show.

Canada’s jobless rate declined to 8 percent from 8.1 percent as 24,400 people stopped looking for work, Statistics Canada said. Economists forecast job growth of 10,000 and an unemployment rate of 8.1 percent, according to the median estimates of 17 economists in Bloomberg surveys.

The U.S. lost more jobs than forecast in September, as median estimate of economists surveyed by Bloomberg News called for a 5,000 drop in employment.

Dollar Strengthens

Canada’s dollar, which initially weakened after the Canadian report, recouped losses following the U.S. release as the data bolstered speculation the Federal Reserve will embark on a renewed round of large-scale asset purchases to spur growth. The Canadian dollar strengthened 0.5 percent to C$1.0125 per U.S. dollar, compared with C$1.0174 yesterday. One Canadian dollar buys 98.77 U.S. cents.

Prime Minister Stephen Harper said in an interview with a Calgary radio station today that “there is nothing today that would indicate to me that we should look at another stimulus package,” according to a transcript provided by his office.

“We will always make sure we’re watching this carefully and we’re flexible if situations change,” Harper said in an interview with CHQR radio.

Growth Effect

CMHC said single-family starts in cities fell 8.1 percent to 63,600 units while urban multiple starts were unchanged at 99,600 units. The breakdown suggests the effect on growth will be bigger than the overall number suggest, because single starts usually contribute more to growth than multiples, said Krishen Rangasamy, an economist with CIBC World Markets in Toronto.

“It’s hard for the Bank of Canada to raise rates in that environment,” Rangasamy said, adding that rates will stay unchanged until the second quarter of 2011. Growth should return to a 2 percent pace by the middle of next year, which would “give the Bank of Canada some justification in raising rates. But even then, we don’t see rates going up quickly,” he said.

Rangasamy said he expects the unemployment rate to stay at around 8 percent through next year.

Claude Guevin, chief financial officer of Rona Inc., Canada’s biggest home-improvement retailer, said concern about the economy means shoppers are “still extremely prudent.”

People “are very selective in their expenses in our sites for the last four, five months,” Guevin said in a telephone interview.

Bank Survey

The Bank of Canada also said today its quarterly poll of executives found a record high gauge of investment plans and optimism about future sales, as well as easier access to credit. Some 46 percent of companies said they plan to increase machinery and equipment investment over the next 12 months while 10 percent predicted less, the Bank said, the widest gap since executives were first asked the question in 1998.

While the numbers are encouraging, they should be discounted because the survey was taken from Aug. 16 to Sept. 16, both Durocher and Rangasamy said.

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