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Business Economic Report

There are many factors that influence decisions to spend, to borrow money or to invest. There are, however, few main ones. These are interest rates, Canadian dollar exchange rate, and inflation rate. However, the most important factor is confidence. People usually feel confident to spend, borrow and invest if country performs well economically. Today I can say that Canada is one of those countries. It is working at a full capacity as real GDP growth and unemployment rate indicate. What goes down must – when it comes to interest rates – eventually go up.

And on June 30, 2004, another cycle of rising interest rates began in North America. For the first time in four years, the U. S. Federal Reserve Board raised rates. The movement of American rates is critical to what happens on this side of the border. According to the Bank of Canada: “Interest rates in Canada are broadly determined by the level of interest rates in the United States, the relative inflation rates in both countries, and the relative stances of their monetary policies. A risk factor is also factored in.

The result is that Canadian interest rates can be either higher or lower than U. S. rates

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but are never fully independent. ” The Bank of Canada joined the upward cycle on September 8, 2004, increasing its overnight loan rate by 0. 25 percentage points to 2. 25 per cent. The bank added another quarter of a percentage point to the rate on October 19 and made it clear that as the economy continued to improve, there was only one way – rates could go up. However, Canadian dollar started to rise rapidly and growth slowed in the second half of 2004 and that got the attention of the Bank of Canada.

It held off on further rate increases – until September 7, 2005, when the rate went up another quarter of a percentage point to 2. 75 per cent. When the bank added a further quarter point increase to an even three per cent on October 18, 2005, it strongly hinted that more rate hikes were on the way. Sure enough, on December 6, 2005, it hiked its key rate another quarter of a percentage point to 3. 25 per cent and again warned that more increases were to come. The bank issued a news release that contained the following telling phrase: “Some further reduction in monetary stimulus will be required.

” However, on January 19, 2006 Statistic Canada updated Consumer Price Index for December 2005 as 2. 2 % which is with in the inflation-control target Bank of Canada desires to keep. As the result, there is a possibility that interest rates will not go up on January 24, 2006 as they might repeat what happened in 2004 – rising Canadian dollar and slow downs in growth. Coming in slightly weaker than expected, core CPI fell by 0. 1 per cent in December. As a result, the annual rate stands at 2. 2 and 1. 6 per cent, respectively.

Interestingly, these annual rates are almost where they sat when 2005 began, suggesting that the great inflation scare from the spike in energy prices last year, failed to materialize to any great extent. So after a year that saw energy prices climb into the stratosphere, inflation failed to increase in 2005. Indeed, with core inflation failing to move appreciably during the latter half of this year, there is clear evidence that there has been no significant pass through of these soaring energy prices into the broader economy.

Certainly, one might point-out that seasonal discounting has helped to keep inflation down. There are also other reasons why inflation failed to budge. First, globalization and the competitive pressures that it brings, has prevented firms from gaining much pricing power. Additionally, the price of many consumer goods like DVD players have been falling dramatically in recent years simply because they can be made more cheaply in places like China. Second, the rising loonie has helped to make imported consumer goods cheaper as well.

But perhaps another major factor why inflation has remained so subdued is that the Bank of Canada has simply not fallen behind the inflation curve. I think that central Bank will continue to hike rates to a more neutral level in the months ahead as Canadian economy continue to expand. It is expanding as latest economic indicators like unemployment rate and GDP growth indicate. In December, there was little overall change in employment as an increase of 36,000 full-time jobs was offset by part-time losses of 38,000.

The unemployment rate edged up 0. 1 percentage points to 6. 5% as more people entered the labour market in search of work. In 2005, employment rose 1. 4% (+233,000), similar to the growth rate observed during the previous year. Full-time job growth finished the year up 2. 0% while part-time employment remained weak (-1. 0%). Total hours worked in the economy were up 1. 3% in 2005. Average hourly wages in December were 3. 8% higher than 12 months ago, while the most recent year-over-year increase in the Consumer Price Index for December was 2.2%.

Alberta, with a very tight labour market and an unemployment rate of only 4. 1%, saw the largest increase in average hourly wages, up 7. 5% from December 2004. In addition to low unemployment rates Canada’s GDP growth is one of the fastest between G-7 countries. GDP growth for 2006 is predicted to be 3. 1 % which gives investors more confidence to invest in Canadian businesses. Investors in return give Canada an opportunity to gain productivity and advance further more in technology to continue competition in world markets.

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