Canada economic growth changes gears

The financial headlines talked about the Bank of Canada's (BOC) decision last night to raise its benchmark overnight rate by 25 basis points to 1% - and the Bank Rate and the deposit rate by the same to 1.25% and 0.75% - as having taken the markets by surprise.

Most were expecting the Canadian central bank to stand pat on monetary policy. But 20/20 hindsight vision makes it clear the BOC needed to follow-up the 25 basis point hike on 12 July with another.

This is how the BOC explained its decision two months ago: "Recent data have bolstered the bank's confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy. The bank acknowledges recent softness in inflation but judges this to be temporary."

At the time, it was looking at first quarter data showing that GDP growth accelerated to 0.9% (2.3% year-on-year) from 0.7% (2%) in the December quarter. Headline inflation was decelerating from 2.1% in January to 1% in June, the same with the core rate (down from 1.7% to 0.9% over the same period). The unemployment rate declined from 6.8% in January to 6.5% in June.

If the BOC was trying to slow growth - it was not concerned with low inflation which it considered as temporary - in July by nudging up borrowing costs, it failed. Hence, the necessity for follow-up.

Not so soon - and not back-to-back - others may argue. After all, monetary policy operates with a lag and the rate hike handed down at its last meeting (July) has not had time to filter through the economy as yet.

That may well be. But economic stats released since then show economic growth momentum continues.

Economic growth went up a gear (or two) expanding by 1.1% in the June quarter - the fastest quarterly pace one quarter short of six years - for an annual growth rate of 3.7% - not seen since the March quarter of 2006.

And while core inflation has remained unchanged at 0.9% in July, headline consumer prices have started to stir - up by 1.2% in the year to July from 1% in the previous month.

Although inflation is still low and below the Canadian's central bank target, strong and solid gains in the labour market would provide more fodder for already "robust" consumer spending. The unemployment rate dropped from 6.5% in June to 6.3% in July - its lowest level since October 2008.

The labour market's link to consumer spending is palpable, with latest available data showing that retail sales expanded by 7.4% in the year to June from an already strong 7.3% in the previous month. This is the fastest annual growth rate in 16 months and the fourth straight month of year-on-year acceleration.

All these support the BOC statement that: "Recent economic data have been stronger than expected, supporting the bank's view that growth in Canada is becoming more broadly-based and self-sustaining."

Read more: BOCCanadianBank of CanadaBank Rate
Link to something kfM1kIIq