Strengthening domestic and foreign demand for Canadian goods led the Bank of Canada on Wednesday to increase its economic growth forecast, suggesting a rate hike may be in the cards sooner rather than later.
Speaking before the Hamilton Chamber of Commerce, Bank of Canada Governor David Dodge said the central bank now believes that economic growth in the first half of the year has likely been "somewhat above three per cent".
With Canada's economy only expected to improve further in the second half of the year, that means the economy will fare far better than the central bank forecast in April.
At that time, the bank forecast that gross domestic product, the broadest measure of economic activity, would expand by 2.75 per cent in 2004 and by 3.75 per cent in 2005.
The central bank considers three per cent to be the benchmark for a healthy economy.
His upbeat forecast raises the obvious question about when the Bank of Canada will begin hiking interest rates. Most market watchers agree a rate hike could come as early as September as the central bank sees less need to stimulate the economy and turns its attention instead to the threat of inflation. However, Mr. Dodge made no direct reference to Canadian interest rates in his prepared remarks.
"Central banks in many countries will have to remove some of the stimulus, and interest rates around the world will have to return to more normal levels," he said.
The Bank of Canada issues its next interest rate decision on July 20.
Mr. Dodge said economic growth is likely to expand above three per cent due to the combination of unused production potential and strong increases in both "final domestic demand and exports" in the first quarter.
"These indicators, along with more recent data, suggest that growth in the first half of 2004 is likely to be somewhat above three per cent."
Mr. Dodge also commented on the fact that surging prices for crude oil have driven up the rate of inflation as consumers are burdened with high gasoline prices. However, he emphasized that oil prices should have only a short-term impact on inflation.
"It is important to note that while higher oil prices may push up the total (consumer price index) over the next few months, they should not feed through into higher trend inflation, as long as inflation expectations remain anchored around the two-per-cent target," he said.
He reaffirmed the central bank's forecast that core inflation, which strips out volatile elements such as food and energy prices, should remain around 1.5 per cent for the rest of 2004. That figure is expected to rise to about two per cent by the end of 2005.
The central bank's target for core inflation is two per cent, within a range of one to three per cent.
