April 12, 2010 / 4:04 PM / 8 years ago

Canadian business mood upbeat; housing starts dip

TORONTO (Reuters) - Economy recovery in Canada is staying on track, reports on Monday showed, with businesses upbeat about hiring intentions and expansion, and the three-month trend for housing starts displaying strength.

The Canadian dollar headed back toward parity with the greenback after a pair of surveys done by the Bank of Canada showed the optimistic business mood, and after Finance Minister Jim Flaherty repeated that the recent rise of the currency has been “relatively orderly”.

In the Bank of Canada surveys, businesses said they are preparing to expand and to hire more workers. Also, twice as many of them now see inflation at the high end of the central bank’s target range of 1-3 percent than did so late last year.

“Responses to the spring survey provide further evidence that the recovery is taking hold,” the bank said.

In a separate survey, senior loan officers at the country’s major banks told the Bank of Canada that business lending conditions had eased in the first quarter, both in terms of pricing and availability.

The survey results focused renewed interest on the Canadian dollar, pulling it to a North American session high of C$1.0011 to the U.S. dollar, or 99.89 U.S. cents, about a third of a cent higher from before the surveys were published and Flaherty made his comments.

The survey results may also tilt the balance slightly toward an earlier than expected interest rate hike by the Bank of Canada, although analysts are divided on that possibility.

Scotia Capital economist Derek Holt said the central bank is likely to “look favorably” on the pair of surveys. Scotia recently moved up its forecast for the bank’s first rate hike to June 1.

But TD Securities continues to expect the Bank of Canada to keep rates unchanged until July.

“Given that these reports tend to form an integral part in the Bank of Canada’s interest rate deliberation process, we expect them to go some way in confirming in the minds of the bank that the Canadian economic recovery is gaining traction,” said Millan Mulraine, senior Canada macro strategist at TD Securities.

“The rise in the inflation expectation is also consistent with the view of a strong recovery, but it is not entirely out of line with historical levels.”

Yields on overnight index swaps, which trade based on expectations for the central bank’s key policy rate, edged higher after the surveys were released, suggesting the market sees interest rate hikes as slightly more likely.

The bank has kept its overnight rate at a historic low of 0.25 percent since April 2009, and pledged to hold it at that level until the end of June, unless inflation strays off the desired path.

The bank targets 2 percent inflation in the medium term. Core inflation reached 2.1 percent in February and those price pressures plus other evidence of strong growth have fueled speculation of an early rate hike.


Figures released earlier on Monday showed Canadian housing starts unexpectedly dipped 1.5 percent in March to 197,300 units from 200,400 units in February, largely because of a decline in the volatile multi-dwelling group.

But the figures for the two previous months were revised higher, suggesting the residential housing sector remains a positive factor in the country’s economic recovery.

“This was no weak report,” said Robert Kavcic, an economist at BMO Capital Markets.

“Single-family starts hit a four-year high, and February’s total was revised up to 200,400 to mark the first month above the 200,000 mark since October 2008,” he said.

Kavcic said first-quarter housing starts rose at a slower pace than in the previous two quarters, rising more than 8 percent, compared with gains of about 15 percent in the fourth quarter and 22 percent in the third.

Additional reporting by Louise Egan in Ottawa, Jennifer Kwan in Toronto, Rod Nickel in Winnipeg; editing by Peter Galloway and Rob Wilson

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