Slower Canada growth may keep rates "low for longer"

Tue Jul 31, 2012 10:22am EDT
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By Louise Egan

OTTAWA (Reuters) - Economic growth in Canada shifted into low gear in May on unexpected weakness in the manufacturing sector, casting doubt on the country's ability to distance itself from the disappointing performance plaguing the United States.

The weaker-than-expected 0.1 percent monthly gain in gross domestic product in May, following a healthy 0.3 percent jump in April, puts the second quarter on track for annualized growth of less than 2 percent.

That means the Bank of Canada will likely remain on the sidelines on raising interest rates until at least 2013 because growth doesn't look fast enough to cause inflationary pressures.

"Following a strong start to the quarter, this print is a bit disappointing and we would not be surprised to see continued weakness bleed into June," David Tulk, chief macro strategist at TD Securities, said in a note to clients.

"We share the (central) bank's desire to take the overnight rate higher once conditions improve, which is very unlikely to happen until at least early in 2013. Until that time, the theme of ‘lower for longer' for the overnight rate will prevail," he said.

The Canadian dollar slipped after the GDP figures were released, falling to C$1.0035 versus the greenback, or 99.65 U.S. cents, from about C$1.0029 just before the data came out.

Canada fared better than most of its peers in the rich, industrialized world in the aftermath of the 2007-09 global financial crisis, prompting the Bank of Canada to become the first central bank in the Group of Seven to tighten monetary policy after the recession.

Since April this year, the bank has again signaled its intention to raise rates, but unless growth accelerates it has little motive to act.   Continued...