Friday, April 28, 2006

Boom Boom

It looks like David Dodge head of the Bank of Canada is stuck back in the eighties when thanks to constant high interest rates the Canadian economy flatened out. Now with the Loonie replacing the pound as the Petro Dollar our economy is booming, and once again Dodge is planning to raise interests rates. Which would be counter-productive.

David Dodge sounds alarm about inflation

The Bank of Canada issued its semi-annual report and solidified expectations another rate hike is pending, despite having raised rates six times since September.

The Canadian dollar closed at 89.04 cents, up from Wednesday's close of 88.61 cents -- the highest since November, 1991, and continuing a surge that started earlier in the week. Mr. Dodge's comments yesterday clearly exposed his fear that inflationary pressure, which has been negligible for more than two years, is no longer as benign as once thought.

"Given these divergent signals from the Bank of Canada and the Fed, look for the Canadian dollar to strengthen in the near term, trading decisively through 90 U.S. cents," said Craig Alexander, deputy chief economist at Toronto-Dominion Bank.

Indeed, Peter Frank, a Chicago-based currency strategist for ABN Amro, wrote yesterday that the loonie would break through 95 cents by the end of this year, the strongest since May, 1977.

And Bank of Montreal economist Sal Guatieri sees the loonie at 92 cents by next year, assuming that commodities prices soften somewhat. If they strengthen, he sees the Canadian dollar moving up to 95 or even 96 cents -- a level not seen for nearly 30 years.

But a growing number of economists say the Bank of Canada should stop raising rates before that happens. Earlier this week, CIBC World Markets warned that the central bank risks overshooting by raising rates when there are few signs of inflationary pressure.

Yesterday, TD Bank added its voice, saying the central bank should hold off on further increases because there is no evidence higher energy prices are causing other prices to rise significantly.

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