Strong Canada growth adds pressure for rate hike

Mon Feb 28, 2011 1:09pm EST
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By Louise Egan and Randall Palmer

OTTAWA (Reuters) - Canada's economy revved back to life in late 2010 on the back of surging exports, raising expectations its central bank will hike interest rates by mid year and pushing the Canadian dollar to a three-year high.

The growth rate rose to 3.3 percent annualized in the fourth quarter, beating the U.S. growth of 2.8 percent and exceeding the 3 percent market estimate.

Statscan's revision of third-quarter expansion to 1.8 percent from 1.0 percent provided an extra lift to sentiment as markets look ahead to the Bank of Canada's interest rate decision on Tuesday. The central bank is expected to keep rates unchanged, but may toughen language to prepare the market for tighter policy in coming months.

An impressive comeback for exports also helped narrow Canada's current account deficit to C$11.05 billion in the same quarter from a record C$16.98 billion, the government statistics agency said.

"It's a stunning gain in exports," said Sal Guatieri, senior economist at BMO Capital Markets. "It's a fairly solid report and (there's) plenty of momentum heading into the new year, given the strong gain in December."

The economy advanced 0.5 percent in December on strength in oil and gas extraction and wholesale trade, again outperforming the market forecast of 0.3 percent growth.

The Canadian dollar rose to C$0.9718 to the U.S. dollar, or $1.0290, after the data, its highest level since February 2008. Money market rates and bond yields rose as traders priced a higher likelihood that Canadian interest rates will rise within months.

The reports show Canada's recovery is gaining steam after a sluggish period last year when anemic U.S. demand and a strong currency hit exports.   Continued...

<p>Bank of Canada Governor Mark Carney leaves his office for a news conference upon the release of the Monetary Policy Report in Ottawa January 19, 2011. REUTERS/Chris Wattie</p>