Surging oil is, on balance, good for Canada: BoC

Business Materials 18 July 2008 08:22 (UTC +04:00)

Soaring oil prices will push Canada's inflation to an above-target peak of 4.3 percent early next year, but the commodity boom brings more good news than bad to the oil-exporting economy, the Bank of Canada said on Thursday, the Reuters reported.

The central bank said income from Canada's hefty exports of oil and other commodities will help revive the economy after an unexpected first-quarter contraction. It expects 0.8 percent growth in the second quarter, up from a previous forecast of 0.3 percent.

"Growth in Canada is going to pick up through the balance of this year, accelerate in 2009 and into 2010," Bank of Canada Governor Mark Carney told a news conference announcing the bank's revised forecasts.

"So we're starting from a slower starting point, but there is an important return to growth."

The bank, which on Tuesday left interest rates on hold at 3 percent, reaffirmed its resolve to stand pat on interest rates even though inflation will briefly climb well above its 1-3 percent target range to hit a five-year high.

The bank said expects the rise in inflation to be short-lived, and it sees no risk that expectations on prices are becoming unhinged.

It said core inflation, which excludes gasoline and other volatile items and is considered the best predictor of future inflation, should stay below 2 percent through 2009.

Carney said high energy prices did not only bring prosperity to the oil-producing provinces of western Canada, but also boosts wages and brings benefits to other sectors.

"That puts us, in the industrialized countries, in very rare company," he said.

But some economists saw that as a positive spin on a tough situation.

"They see inflation going back to 2.9 percent by the second quarter (of 2009) and that's probably an optimistic view of things," said Benny Tal, senior economist at CIBC Capital Markets.

John Clinkard, chief economist at Deutsche Bank Canada, expects the bank to hike interest rates in the fourth quarter because of the inflation pressures.