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Inflation to hit 3%, but don't expect much of a pay raise Add to ...

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Inflation to hit 3%

Some sobering thoughts today from the Bank of Canada: Inflation is soon to hit about 3 per cent, buoyed by high energy costs and the harmonized sales tax, but wage growth is expected to remain "modest."

Economists have been warning that rising costs at the gas pump and at the grocery store will force consumers to shift their households budgets. Today, as it held its benchmark lending rate steady at 1 per cent, the central bank warned it expects inflation to rise to 3 per cent in the current quarter, but contended it won't stay that high.

"While underlying inflation is subdued, a number of temporary factors will boost total CPI inflation to around 3 per cent in the second quarter of 2011 before total CPI inflation converges to the 2 per cent target by the middle of 2012," Bank of Canada Governor Mark Carney and his colleagues on his rate-setting panel said in their statement.

"This short-term volatility reflects the impact of recent sharp increases in energy prices and the ongoing boost from changes in provincial indirect taxes," they said.

They noted that so-called core inflation, which strips out volatile items, has declined, also partly because of temporary factors, but will rise gradually to 2 per cent by the middle of next year "as excess supply in the economy is slowly absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored."

Note the bit about wage growth.

The central bank is also growing ever more anxious over the strength of the Canadian dollar .

Even as they boosted its forecast for the Canadian economy this year, projecting growth of 2.9 per cent, Mr. Carney and his colleagues warned of the threat from the loonie.

"The persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices."

Economists noted the comments on the dollar, and projected the central bank will hold off hiking the overnight rate for some months yet.

"Its growth rate of 2.9 per cent for 2011 implies that while it will be upgrading its [first-quarter]forecast, it won't be raising its forecasts for subsequent quarters," said Avery Shenfeld, chief economist at CIBC World Markets.

"The C$ likely plays a role in staying their hand on the rest of the outlook. Second, the Bank separates the discussion of the C$ into its own paragraph, and its language ('persistent strength' causing 'even greater headwinds) shows a degree of discomfort. By placing it right before the statement on rates, it's clear that it sees the C$ as a key reason why, despite the more rapid closing of the output gap, it's not raising rates yet," Mr. Shenfeld said in a research note after the Bank of Canada's announcement.

"Moreover, it doesn't note that the recent climb has been what it used to call a 'type one' appreciation, one caused by an improvement in the terms of trade and therefore of less risk to growth. All of this is consistent with our view that the Bank of Canada would prefer a somewhat softer currency as the launch point for rate hikes that could take it stronger again. That limits the strong side for the C$ outlook, since we won't get the full dose of rate hikes if it climbs again."

Separately, while the economic outlook may be brighter, the central bank said it now expects overall inflation could hit as high as 3 per cent this quarter. And here's something to note from the bank's accompanying statement: Wage growth is expected to stay "modest."

Here are the views of several observers on the central bank outlook:

"Stronger growth in Canada has shortened the time frame needed in the renormalization of short-term interest rates - that remains the key take-away from today's statement. If one wants to read between the lines, the BoC seems in no great hurry to start the campaign and a May hike would require some more convincingly firm data (watch, in particular, the release of Q1 GDP data on May 30). However, on the assumption that things unfold as per the BoC's outlook, we see no significant obstacle to the first rate hike coming in July as per our most recent forecast." Mark Chandler, RBC Dominion Securities

"The BoC remains confident about global and U.S. growth and has upgraded its forecast for the Canadian economy. We think that the BoC is very careful not to sound too optimistic so as to prevent a repricing of rate expectations and cause further appreciation of the Canadian dollar, especially now that it seems more concerned about the exchange rate. There is nothing in the statement that let us believe that the BoC is ready to hike rates at the May meeting and we continue to believe that the BoC will raise rates at the July meeting." Charles St-Arnaud, Nomura

"We continue to believe that the bank will hold off until July before raising rates, as there is no smoking gun here signalling a quick return to tightening. While the bank is less concerned about the global and U.S. risks, it is focused on the strong loonie. The needle is slowly moving to renewed rate hikes, but a hike is not yet imminent." Douglas Porter, BMO Nesbitt Burns

"We still believe that a July rate hike is the best bet. Notably, by that time the U.S. Federal Reserve will have completed its second round of quantitative easing, reducing the risk of further upward pressure on the Canadian dollar. The bank today served up a reminder of the downside risks to growth and inflation surrounding the elevated loonie." Francis Fong, Toronto-Dominion Bank

"The policy statement from the Bank of Canada this morning signalled that it is still in no rush to raise interest rates. In particular, it offered no hint that a summer rate hike is coming, supporting our view that policy could be on hold for a lot longer than most other analysts expect." David Madani, Capital Economics

"Despite a high flying loonie, that could create headwinds for the Canadian economy, growth has been revised up materially from 2.4 per cent to 2.9 per cent in 2011 and the economy is expected to reach full capacity six months earlier than previously expected. In our view, this is setting the stage for the Bank of Canada to provide some guidance on interest rates in May and the resumption of the normalization of monetary policy starting in July. The Bank should be aiming for an overnight rate of 2 per cent by year end." Paul-André Pinsonnault, National Bank

Trade surplus shrinks Canada's trade surplus unexpectedly shrank in February on lower exports of crude petroleum and cars, The Globe and Mail's Tavia Grant reports today.

The surplus narrowed to $33-million in the month from a revised $382-million, Statistics Canada said.

Both imports and exports fell. Exports tumbled 4.9 per cent after four straight months of growth while imports slid 4 per cent.

Lower volumes of both energy products and automotive products were the main reasons for the export decline, the agency said.

Lower volumes of both energy products and automotive products were the main reasons for the export decline, the agency said.

On gazebos and toilets Here are some suggestions for Tony Clement should he be re-elected, return to Ottawa as industry minister, and get another $50-million to play with:

Build a Muskoka-style gazebo an hour's drive from the Potash Corp. mine outside Esterhazy, Sask. It could be a place for BHP Billiton's Marius Kloppers to rest and gaze longlingly because that's as close as he's ever going to get to that mine. Actually, let's just move the gazebo from Muskoka and save the $100,000 to pay down debt.

Build a Muskoka-style park outside the Toronto Stock Exchange. It would be sporting to have a lovely English garden ready for when the British arrive.

Build Muskoka-style toilets outside Konrad von Finckenstein's house, for the next time Mr. Clement tells the CRTC chairman to get off the pot.

New-house prices rise New-house prices in Canada rose 0.4 per cent in February, following on January's 0.2-per-cent gain, Statistics Canada said today.

Prices rose the most in Regina, at 1.8 per cent, followed by Ontario's Kitchener-Waterloo region at 1.7 per cent, Charlottetown at 1.5 per cent, and Edmonton at 1.1 per cent, the agency said as it released its new housing price index.

Prices fell in Calgary, by 0.4 per cent, Windsor by 0.3 per cent, the Ottawa-Gatineau area by 0.2 per cent, and Saint John, Fredericton and Moncton by 0.1 per cent.

Year over year, Statistics Canada said, the index climbed 2.1 per cent in February, compared to 1.9 per cent in January.

Analysts keen on Gildan Analysts are boosting their price target on shares of Gildan Activewear Inc. in the wake of $350-million (U.S.) deal for sock maker Gold Toe Moretz Holdings Corp.

Although Gildan already has some socks in its portfolio, yesterday's deal offers access to new distribution channels, The Globe and Mail's Bertrand Marotte reports from Montreal.

UBS Securities Canada analyst Vishal Shreedhar boosted the target on Gildan stock to $40 from $37, saying the deal expands the company's market opporltunities in three ways:

  • Gildan gets new retail relationships with wholesale clubs, specialty sporting goods chains, department stores, mass merchants and national chains given's Gold Toe's existing connections to outlets such as Sam's Club, Costco, Dick's Sporting Goods and Macy's.
  • New brands and exclusive licences heighten opportunities beyond private labels.
  • New third-party connections could expand the wholesale market beyond high-volume basic apparel.

UBS did cite some "negatives," including the fact that Gildan may now be one of the biggest sock suppliers, but its brands are not leading ones.

TD Newcrest analyst Jessy Hayem boosted the price target to $43 from $39, while National Bank analyst Hugues Bourgeois upped his target to $40 (U.S.) from $36.

In Economy Lab today

Feeling the pinch from high prices at the pump? You're not alone, Tavia Grant reports.

Waiting for a surplus to implement a costly new program may on the surface seem like a prudent way to control government spending. However, since these programs are not one-time costs, but rather ongoing spending, it is in fact a recipe for fiscal disaster, Mike Moffatt writes.

In Personal Finance today

Many things doctors recommend can be eligible for tax credits and deductions, but be sure you have the paperwork to back them up.

A look at quirky and unexpected items Canadians have tried to get past the Canada Revenue Agency - often successfully.

We're all feeling the sting of higher food and gas prices, but it won't fuel an interest rate increase, Rob Carrick writes.

From today's Report on Business

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