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About that loonie ...

It’s not just that trip south that’s costing us more. We’re paying higher prices here at home, as well, because of the lower Canadian dollar.

There are different ways of measuring it, but here’s the bottom line: The Bank of Canada expects consumer prices to be 1.5 per cent higher by the end of this year than they otherwise would have been because of the loonie’s effect on import costs.

That’s because of the “pass-through” effect of the fast-eroding loonie, which tumbled again yesterday when the central bank cut its benchmark overnight rate to just 0.5 per cent.

And it won’t stop there, said a central bank that’s counting on a weaker currency to help juice the flagging economy via a rebound in exports.

“Pass-through will remain a key factor affecting the dynamics of inflation through the end of 2016,” the Bank of Canada said in the monetary policy report released alongside its rate decision.

The central bank was looking at the impact on total inflation and so-called core prices, which exclude volatile items.

According to the Bank of Canada’s measures, the eroding loonie is now boosting inflation by 0.7 to 0.9 of a percentage point, and core inflation by 0.4 to 0.6 of a point.

“Comparing the inflation rates of goods in Canada with high import content with those of their U.S. counterparts also suggest that pass-through plays an important role in explaining the recent strength of core inflation,” the central bank said.

“The prices of many goods are currently growing at a much faster pace in Canada than in the United States, particularly for durable goods such as furniture and appliances.”

For consumers, we see the effect in a wide range of things we buy.

“I believe that the upward pressure on import prices from the lower loonie is quite evident in Canadian inflation,” said chief economist Douglas Porter of BMO Nesbitt Burns.

“You can see it in book prices, and even to some extent in car and clothing prices,” he added.

“Canada now quietly has one of the highest inflation rates in the industrialized world - admittedly at 0.9 per cent, it’s not going to scare anyone, but it’s much higher than the near-zero numbers in Britain, the U.S., Japan and Europe, and I would lay that the feet of the lower loonie.”

Mr. Porter, noting the currency was “bludgeoned” by the rate cut, along with the downgraded economic outlook, the Fed’s plans and yet another dip in oil prices, added later in a research note that “we would remain negative on the [Canadian dollar] over the next few months, heading into the election and Fed rate hikes.”

The good news is that the impact should peak in the current quarter. The not-so-good news is that it will fade “gradually” by the end of next year.

Core inflation, the central bank said, has jumped by almost a full percentage point since early 2013, primarily because of the run-up in core goods.

“Excluding soaring meat prices (0.2 percentage points) and the unwinding of the drag from intense retail competition (0.3 percentage points) leaves about 0.5 percentage points that can be explained by exchange rate pass-through,” it added.

Statistics Canada will report the latest inflation numbers, for June, on Friday morning. And they’re not expected to change all that much, with annual total inflation somewhere in the 1-per-cent area, and core at just over 2 per cent.

“There’s no doubt that a cheaper loonie is playing a role in boosting core, and further slippage in the loonie means that core shouldn’t stray too far from 2 per cent this year despite the depressing effects of a slowing economy,” said Nick Exarhos of CIBC World Markets.

Sharks in the Aegean ...

Source: Giphy.com

“We're gonna need a bigger bailout.”

ECB unveils emergency funding

The Greek bank rescue mission is finally under way, but it is coming slowly, our European bureau chief Eric Reguly reports.

Greek banks will receive an additional €900-million in emergency loans over one week, European Central Bank president Mario Draghi said today.

Whether the amount will allow the banks to reopen their door was not immediately known. The banks have been closed for more than two weeks, with ATM withdrawals limited to €60 a day. Capital controls are likely to stay in place for some time even if the banks do open.

The decision to boost loans to the banks came only a few hours after the Greek parliament approved some of the deepest austerity and economic reform measures seen in the euro zone since the start of the debt crisis in 2009.

Quote of the day

“By the amount of Molotov cocktails flying around in Athens, the Greek public don’t seem too impressed.”
Jonathan Sudaria, London Capital Group

Magna strikes deal

Magna International Inc. has pulled off one of the biggest acquisitions in its history, buying German transmission maker Getrag Group for €1.75-billion ($2.5-billion Canadian), The Globe and Mail’s Greg Keenan reports.

The 80-year-old company will expand Magna’s presence in transmissions and transmission parts, which the Canadian auto parts giant has identified as a “strategic priority,” Magna chief executive officer Don Walker said in a statement today.

The German company posted sales of about €1.7-billion in 2014, excluding about €1.6-million in sales generated by its joint ventures.

Earnings flood in

Corporate earnings reports are pouring in again today.

Stat of the day

$5.4-billion
Divestment of Canadian securities by foreign investors in May: Statistics Canada.
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