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What to watch for in Carney's monetary policy report

Bank of Canada Governor Mark Carney

Adrian Wyld

Bank of Canada Governor Mark Carney is expected to leave his benchmark interest rate at 1 per cent Tuesday, citing continued uncertainties outside of Canada's borders while acknowledging that the North American recovery gained momentum in the first few months of the year. On Wednesday, though, all eyes will be on the central bank as it releases its quarterly Monetary Policy Report, a detailed forecast backed by charts, graphs and statistics that could include clues about when the next series of rate hikes may arrive.

Mr. Carney may be more guarded than usual, since the mid-campaign report comes exactly between the leaders' election debates, but here are four areas to watch:

CANADIAN GDP: The economy grew for a fourth consecutive month in January, according to the most recent data available from Statistics Canada, reinforcing the view that first-quarter growth on an annualized basis likely came in at a much faster clip than the 2.5-per cent pace that Mr. Carney predicted at the beginning of the year. However, Canada's job growth momentum stalled in March, signalling the economy may not be able to maintain the heated expansion it experienced at the start of 2011, and the unemployment rate is still well above precrisis levels.

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U.S. GDP: As always, what happens to the economy south of the border has the biggest impact on Canada's outlook. Right now, the U.S. employment situation is headed in the right direction, with the jobless rate falling to 8.8 per cent in March, the lowest in two years. U.S. factories are leading the rebound and are expected to continue adding staff in the months ahead, evidence that tax cuts and the Federal Reserve's moves to stimulate demand are working. The question is the degree to which the U.S. rebound will benefit Canada, how quickly, and how much of a hit the turnaround might take when stimulus ends.

INFLATION AND SLACK: Despite higher food and energy costs, underlying inflation in Canada is still tame - for now. The central bank's latest survey of businesses across the country showed a growing number of Canadian companies are bracing for hotter inflation as energy and food costs increase. In some cases, those expectations are already translating into higher prices for consumers, so it's clear that at some point soon, inflation could become less manageable without tighter policy. Also, Mr. Carney's report could show he expects the slack left in the economy by the recession will be absorbed sooner than thought at the time of the bank's last forecast. That would imply a faster-than-expected path back to a more "neutral'' footing, i.e. an interest rate of between 3 and 4 per cent.

EXPORTS AND HEADWINDS: Mr. Carney has been counting on exports and business investment taking over from government stimulus to carry the recovery forward. But in his January forecast and his March 1 rate decision, the central banker noted that the ability of companies to take advantage of improvements south of the border and abroad is being held back by a strong loonie and sluggish efforts to improve labour productivity. With the Canadian dollar above parity with the greenback, the situation in Libya and its effect on oil prices far from resolved, the European debt crisis getting trickier and Japan's disasters causing auto plant shutdowns in North America, anything the Governor says about exporters' prospects will be news.

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About the Author
Economics/business writer

Jeremy has covered Canadian and international economics at The Globe and Mail since late 2009. More

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