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Canada due for interest-rate hike: economist

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PITTSBURGH -- Good news, everybody, an interest hike is in our immediate future.

Seriously, that's the good news.

It might not make sense to a lot of Canadians, but when the Bank of Canada finally decides to raise interest rates -- either late in 2014 or early in 2015 -- that's as sure a sign as any the economy is finally on solid footing more than five years after the downturn.

Bill Adams, senior international economist at PNC Bank in Pittsburgh, said with a national unemployment rate of 6.9 per cent, "decent" wage growth and an economy clipping along at 2.5 per cent annual GDP, Canada is doing "quite well."

With those numbers expected to continue to improve, Adams said he expects Bank of Canada Governor Stephen Poloz to gradually raise interest rates in search of the right balance between growth and keeping the economy from overheating.

Adams said the Bank of Canada has built an "excellent" track record of achieving its inflation targets and he doesn't expect that to end anytime soon.

"The slack in the Canadian economy will be close to being absorbed. Monetary policy needs to act a couple of quarters ahead (of the economy). That suggests a rate hike is a reasonable choice in the near future," he said.

If Poloz focuses on the exchange rate -- the loonie is currently sitting around 91 cents US -- he foresees a quarter-point interest rate hike in the last quarter of 2014. At the latest, though, he predicts it occurring during the first half of 2015.

"While (Poloz) has avoided explicitly talking down the Canadian dollar, the rotation of demand he'd like to see in the Canadian economy away from residential housing and consumer demand and towards business investment and exports, would clearly be aided by a weaker (loonie)," he said.

"To facilitate that, I think the Bank of Canada would like to hold off on an interest rate hike as long as it can."

Adams believes the Federal Reserve will follow a similar strategy and raise interest rates in the U.S. in the near future, too, which he considers a "really big turning point."

"It's a sign that our economy is healing and that's great news for us," he said.

Considering the vast majority of Canadian exports head to the U.S., that's great news on this side of the border, too.

He said Canada stands to benefit from a recovering global economy, too, though it's doing so in fits and starts.

"The weaker exchange rate is a tail wind for Canada. It will ironically do more to boost Canadian household consumption than Canadian exports (by reducing cross-border visits to the U.S.), he said.

Adams predicted the Canadian dollar will strengthen by a few pennies to the mid-90s range into 2015.

PNC is one of the largest banks in the U.S. based on deposits and branches. In February, it received regulatory approval to expand its commercial banking services in Canada to include deposits and treasury management services to Canadian companies and U.S. firms doing business north of the border.

 

Geoff Kirbyson is touring the U.S. as part of a U.S. government program called U.S.-Canada: Partners in Economic Development.

geoff.kirbyson@freepress.mb.ca

Republished from the Winnipeg Free Press print edition April 12, 2014 B6

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