Bank of Canada won't be spooked in setting interest rates: David Dodge
* * * * Ross Marowits, Canadian Press Published: Wednesday, June 21, 2006
MONTREAL (CP) - No single piece of economic data is going to stampede the Bank of Canada when it comes to setting interest rates, bank governor David Dodge said Wednesday.
A day after Statistics Canada reported stronger-than-expected inflation and hours after the agency tallied record monthly retail sales, Dodge said the central bank looks at the whole picture, not individual factors, in setting monetary policy.
Some analysts have predicted the inflation rate of 2.8 per cent reported for May will push the bank to hike short-term interest rates at its next rate-setting meeting July 11.
Dodge acknowledged being surprised by the hot inflation numbers but said the central bank is waiting for June employment data before making its interest-rate decision.
"It's really important to try to take all of this together to try to make a complete picture - and most importantly to assess the implications for how conditions are likely to be out there 12 to 24 months hence," he said.
He acknowledged that the strong Canadian dollar - which got another boost over 90 cents US from Wednesday's reported 1.7 per cent increase in April retail sales to $32.8 billion - is stressful for some industries and their workers, but "there really is not much alternative but to adjust."
He added that Canada's strength lies in flexibility, and the bank has been "quite surprised and pleased with the rapidity with which the economy has adjusted this time compared to our experience in the '70s and '80s."
Since the bank raised its trend-setting overnight rate by a quarter-point to 4.25 per cent last month but indicated it was ready to end its seven-hike series of increases, economic statistics have been volatile.
"Some of these indicators have been stronger than expected, others have been weaker," Dodge said.
But the bank's April forecast of two per cent inflation in 2007 and 2008 should hold, excluding temporary effects from the July reduction in the GST, he said.
Statistics Canada predicts that the one percentage point drop in the GST taking effect July 1 could cut inflation by 0.6 percentage point.
Dodge said the overall economic picture still looks good, despite some international volatility.
He said public policies have to help the country adjust to the strong loonie, and governments can improve the situation by investing in human capital and physical infrastructure.
Better education to produce a more capable labour force and improvements in roads, pipelines, bridges and even the "information highway" will boost growth and prosperity, Dodge added.
Governments can also help with policies that promote economic flexibility, whether by removing barriers to worker mobility or making capital markets work more efficiently.
© The Canadian Press 2006
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