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Bank of Canada to delay raising interest rates

The Canadian dollar softened to its lowest level in more than a week after the country reported economic growth in May came in slower than forecast, prompting speculation the Bank of Canada will have to delay raising interest rates.

The Canadian dollar was trading at 96.91 U.S. cents, at 9:33 a.m. after dropping as low as 96.74 U.S. cents immediately after Statistics Canada reported that gross domestic product grew by 0.2%. Economists had looked for a 0.3% rise from April.

“It would suggest the economy is not performing as well as the Bank of Canada has been expecting, so that may increase expectations that policy stays on hold for even longer,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, by phone from Toronto before the report.

Canada’s economy continued its slow pace of growth in May, supported by service industries like retail and wholesale trade but tempered by weaker oil and gas extraction activity.

Growth was still better than the 0.1% pace in April and marking the fifth straight monthly increase.

On a year-over-year basis, the pace of grow was 1.6% in May, the federal agency said.

Gross domestic product has been expanding at a moderate monthly pace since January, and that is not expected to change in the coming months.

The economy grew by a much stronger 2.5% between January and March, but most economists expect limited quarterly expansion of about 1.5% annualized for the remainder of this year.

The weak outlook will continue to keep a lid on borrowing costs, limiting any move by the Bank of Canada to start raising its trendsetting overnight rate of 1% to late 2014 at the earliest, according to economists.

The central bank has forecast overall growth of 1.5% this year, following a 1.7% gain in 2012. However, policymakers are looking for a 2.7% advance in both 2014 and 2015.

Construction, meanwhile, was unchanged in May, the federal agency said. “Gains in residential building and repair construction were offset by declines in engineering and non-residential building,” it noted.

“The output of real estate agents ands brokers rose 3.4% in May, up for the third consecutive month, as activity in the home resale market increased.”

Source: Gordon Isfeld, Financial Post