24 October 2002, 09:05  Slower Inflation, Retail Sales Cut Rate-Increase Odds

/www.bloomberg.com/ By Kevin Carmichael and Greg Quinn
Ottawa, Oct. 23 (Bloomberg) -- The Bank of Canada will put off plans to raise interest rates until next year, investors said after reports showed prices increased at a slower pace in September and consumers bought fewer big-ticket items in August.
Central bankers, in their Monetary Policy Report, reiterated that they don't plan to increase rates to control inflation until global economic growth picks up. They said price increases that may push inflation to 4 percent by year-end are ``temporary,'' and the pace of price gains should drop back to the central bank's target of 2 percent late next year.
The economic reports signal that Bank of Canada Governor David Dodge has the leeway to delay increasing borrowing costs to underpin growth at home until demand picks up in the U.S., the destination of 85 percent of Canada's exports.
``You'd probably get through the first quarter of next year before you even think about raising rates,'' said Al Brownridge, who manages C$2 billion ($1.3 billion) in bonds for Investors Group Inc. in Winnipeg, Manitoba. ``Our central bank policy is essentially on hold. You can see our major trading partner getting weaker.''
Dodge and his five policy-making deputies left their benchmark overnight target for loans between banks unchanged at 2.75 percent in September and October after raising rates by a quarter point at three previous meetings. Eight of 13 economists told Bloomberg News earlier this month that they expect no increase until next year.
Lower Yield
The yield on the December contract for short-term bankers acceptance loans, which signals where investors expect rates to go, fell to its lowest in two months as investors pared expectations of a rate increase. The yield declined 3 basis points to 2.91 percent, leaving it less than quarter point above the Bank of Canada's 2.75 percent target rate for overnight rates.
The Canadian dollar rose to 63.86 U.S. cents at 4:27 p.m. from 63.76 cents. Bond prices advanced, with the benchmark 5.25 percent coupon bond maturing in 2012 rising 18 cents to C$99.63.
The Bank of Canada said the pace of economic growth will slow, with the economy expanding by 3.5 percent this year and between 2.75 percent and 3.75 percent in 2003. The economy, fueled by record purchases of automobiles and houses, expanded at annual rates of 6.2 percent and 4.3 percent in the first and second quarters respectively.
Near Capacity
Even so, Canada's economy is ``operating not far from capacity,'' Dodge said at press conference. ``We will need to continue to remove monetary stimulus before the excess supply in the economy is completely absorbed. The pace, and extent of this action, will depend on the balance of external and domestic developments.''
Statistics Canada's consumer price index rose 2.3 percent in September, less than 2.6 percent economists expected and down from 2.6 percent in August. Total retail sales advanced 0.2 percent in August from the previous months, as reduced purchases of cars, trucks and furniture muted higher returns at drug stores.
Retail sales rose 0.2 percent to C$25.7 billion, from a revised C$25.6 billion the previous month, StatsCan said. The median estimate of 15 economists surveyed by Bloomberg News was for a 0.7 percent increase.
Lower inflation and retail sales are ``consistent with a moderation in the economy,'' said Scott Colbourne, who manages C$2.5 billion in fixed-income at AGF Management Ltd.
Furniture
Retailers reported a 0.2 percent decline at car dealers and a 0.6 percent drop at furniture and appliance stores. Sales at drug stores offset those declines, and Bank of Montreal Chief Economist Tim O'Neill said the job increases reported in every month through September should keep demand from falling much further.
That's the way John Forzani, chief executive of Canada's largest seller of sporting goods, sees it. The head of Calgary- based Forzani Group Ltd. said he hasn't had to cut prices and expects demand for everything from hockey sticks to ski jackets to remain strong heading into the Christmas season.
``When things get tougher, people will trade down; they'll buy the less expensive running shoe,'' Forzani said in an interview. ``We're not seeing that. We think it's business as usual more than it's recessionary.''
Customers at The Brick, Canada's largest chain of furniture and appliance stores, are leaning toward buying less expensive versions of goods, Chief Financial Officer Ron Tweddle said.
``Our customers are middle-class moms,'' he said. ``That customer is a little uncertain and looking to spend their money wisely.''
The Brick, a closely held company based in Edmonton, Alberta, will have annual sales of about C$900 million this year, Tweddle said.
Higher borrowing costs will make it tougher for Brick patrons by cutting disposable income, and cut into the company's profits by making it more expensive to shoulder borrowing costs for customers under zero percent financing plans, he said.
The customers and the company may get a break from Dodge, who said last week that the ``ramp'' rates have to climb isn't as steep as he thought last year.

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