March 14, 2011 / 12:43 PM / in 7 years

Canada Q4 industrial capacity use disappoints

OTTAWA (Reuters) - Canada’s fourth-quarter industrial capacity use came in at an unexpectedly low 76.4 percent on Monday, adding to a series of soft data that has taken pressure off the Bank of Canada to raise interest rates.

Another indicator closely watched by the central bank, the ratio of household credit market debt to personal disposable income, fell to 146.75 percent from a downwardly revised 146.87 percent, as income gains outstripped debt growth.

The industrial capacity use rate marked the sixth straight quarterly rise, but the rate of increase is falling and the statistic remained well below the historical range of 80 to 90 percent that was seen in the two decades before 2008.

The market had expected the rate to hit 79.0 percent but Statistics Canada revised the series downward. The third quarter was revised down to 76.2 percent from 78.1 percent initially.

The figure is one measure of whether inflationary pressures are building, and the market is increasingly skeptical that the Bank of Canada will soon resume its interest rate hikes.

The yields on overnight index swaps, which trade based on expectations of moves in the bank’s policy rate, show the market pricing in a 99 percent probability that the bank will keep its key rate at 1 percent on April 12. The market has not fully priced in a rate hike before the bank’s September 7 decision date.

Traders had already scaled back the odds of a near-term rate hike on Friday after a report showed Canada’s economy delivered lackluster job growth in February.

Canada’s currency hit a session low against the U.S. dollar immediately after Monday’s data. The Canadian dollar recovered slightly to C$0.9743 to the U.S. dollar, or $1.0264, by mid-morning.

Bond markets were stronger across the curve but this had more to do with sliding stocks and the turmoil in Japan than the capacity utilization data.

WORRYING HOUSEHOLD DEBT RATIO DOWN

The decline, however slight, in the household debt ratio eases one area of concern for the Bank of Canada.

Household credit market debt rose 1.6 percent, while personal disposable income climbed by 1.8 percent. Household net worth also rose 2.2 percent in the fourth quarter to C$6.2 trillion ($6.3 trillion).

Bank of Canada Governor Mark Carney and Prime Minister Stephen Harper had both voiced their concerns about the level of household debt, lest it trigger a credit crisis like that which started in the United States in 2008.

Carney warned Canadians in January to take steps to limit their debt so it does not become unsustainable when interest rates rise.

RBC economist David Onyett-Jeffries said the improved ratio “will go some way to ease market concerns over household debt loads.”

He added: “Bank of Canada data for the first quarter of 2011 indicate that consumer credit growth has eased further still, with the annual rate of increase hitting lows not seen since the early 1990s.”

Last year Canada became the first of the Group of Seven advanced economies to start hiking rates after the financial crisis hit, raising the overnight rate three times. However, Carney has noted that at 1 percent it is still very low.

Editing by Jeffrey Hodgson

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