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Friday, August 04, 2006

Interest Rates to Stay Put

The following report from Bloomberg predicts that the Bank of Canada will not raise interest rates for the rest of the year, because the unemployment rate has increased and the dollar has dropped. Here is most of the article...

Canada Lost 5,500 Jobs, First 2-Month Drop Since 2004 (Update2)

Aug. 4 (Bloomberg) -- Canadian employers unexpectedly shed 5,500 jobs in July, marking the first consecutive monthly declines in almost two years, strengthening the case for the Bank of Canada not to raise interest rates again this year.

The unemployment rate rose to 6.4 percent from 6.1 percent in June, which was the lowest since 1974, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg News expected 23,500 new jobs in July and a jobless rate of 6.1 percent.

The report suggests one of the most robust aspects of Canada's 15-year economic expansion may be weakening, because of a strong currency higher borrowing costs. Economic growth stalled in May for the first time in eight months.

``This reinforces expectations that the Bank of Canada will remain on the sidelines,'' said Paul Ferley, assistant chief economist at the Bank of Montreal in Toronto.

Canada's dollar fell to 88.50 U.S. cents at 9:09 a.m. in Toronto from 88.85 cents late yesterday. One U.S. dollar buys C$1.1300. The currency reached a 28-year high of 91.44 U.S. cents on May 31.

The currency has weakened since then as investors anticipated Canada's central bank would stop raising rates. The Bank of Canada paused on July 11 after seven consecutive moves. Two days later, Governor David Dodge said he expected the high dollar and slower U.S. growth to curb demand for exports, in particular manufactured goods.

Manufacturing

Manufacturing led the July decline with 33,300 jobs shed, the industry's biggest loss since January. The related transportation and warehousing sector shed 16,900 jobs in July. Factories have fired 224,000 workers since the end of 2002, or 9.6 percent of their staff, StatsCan said today.

Canadian Dollar

The dollar's 40 percent rise since the end of 2002 has slowed exports to the U.S., which make up a third of Canada's C$1.1 trillion economy, the world's eighth-largest. Exports fell to the lowest in a year in May as energy and lumber shipments dipped, StatsCan said July 12.

The job market has been volatile in the past three months, swinging from a near-record 96,700 new jobs in May to a loss of 4,600 in June, and the July decline that was the biggest since December.

Carmichael said the average growth of 29,000 jobs during the past three months shows the market hasn't collapsed.

Employers added 21,600 full-time jobs last month. They shed 27,000 lower-paid part-time staff, StatsCan said today. The labor force, the number of Canadians 15 and older holding or looking for a job, rose by 64,200.

Hourly Wages

Average hourly wages advanced 3.7 percent in July from a year earlier, faster than June's 3.5 percent gain. The consumer price index, the main measure of inflation, advanced 2.5 percent in June from a year earlier, and StatsCan reports the July consumer price index on Aug. 22.

The 10,100 jobs lost in the last two months compares with a loss of 25,500 during July and August 2004, the last time employers shed workers in two straight months.

There are other signs the economy isn't slipping much. The price of an existing home rose 12 percent in June from a year ago, to a fifth-straight record, the Canadian Real Estate Association said July 17. Exporters are adjusting to the higher dollar and interest rates and consumers are still spending, Governor Dodge said July 13.

Still, StatsCan's report on economic growth in May, which was released July 31, also showed declines in areas that have fueled the economy during the last few years. Retail sales, construction, and oil and natural gas production all dropped, the report said.

Full Capacity

Record retail sales, construction and oil and gas production had helped push Canada's economy past the limit of what it can make without rapid inflation, the central bank said last month. The currency and interest rate will slow economic growth through 2008 and return the economy to full capacity, the bank said in its July 13 monetary policy report.

Canada's economic growth will slow to 2.9 percent next year from 3.2 percent this year, the central bank's report said.

U.S. employers created 113,000 jobs in July, fewer than economists expected, the Labor Department reported today in Washington. The U.S. unemployment rate rose to 4.8 percent, from 4.6 percent.

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