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To: Johnny Canuck who wrote (42734)	10/20/2005 11:17:20 PM
From: Johnny Canuck	Read Replies (2) \| Respond to of 69299

Continued growth means more rate hikes over next 18 months: Dodge Sandra Cordon Canadian Press Thursday, October 20, 2005 "The global and Canadian economies have continued to grow at a solid pace, and our economy now appears to be operating at full production capacity," Governor of the Bank of Canada, David Dodge said.(CP PHOTO/Fred Chartrand) OTTAWA (CP) - Despite some distant storm clouds on the economic horizon, Canada's growth is healthy enough to warrant more interest rate hikes in the coming months to keep a lid on inflation, Bank of Canada Governor David Dodge said Thursday. Only two days after he raised rates for the second time in as many months, Dodge gave no hint of the timing or number of future rate increases. But more will be needed, he said, despite the central bank's decision to trim its GDP growth forecast for next year due to a strong dollar, high energy prices - and sluggish Canadian productivity. "There's still considerable monetary stimulus in the economy," Dodge said in his first comments since boosting the bank's key policy interest rate by a quarter point to an even three per cent Tuesday. That followed a similar quarter-point hike in early September. "The global and Canadian economies have continued to grow at a solid pace, and our economy now appears to be operating at full production capacity," Dodge added, as he released the central bank's latest report on the economy. Analysts suggested that won't mean an unbroken string of rate hikes but could result in three or four more quarter-point hikes by mid-2006 to raise the bank's trend-setting rate to as high as four per cent. Many chartered banks follow the central bank's lead, raising such consumer costs as prime lending rates and variable-rate mortgages. Despite a generally rosy view of growth, at least in the near-term, Dodge noted several longer-term threats - especially after 2007. Dodge took particular aim at sluggish Canadian productivity, which has become a major political issue as the minority Liberal government aims to make the issue of boosting living standards a key plank in an election expected early next year. Lacklustre productivity is weighing on economic growth and will become a greater burden in coming years as an aging population shrinks the country's workforce, Dodge warned. "The only way that we can increase our real incomes as Canadians is if we increase real output," he said. That means a smaller workforce in future, where individuals must learn to produce more valuable goods in less time or see their living standards continue to slide, he added. Boosting productivity "is the only way we can maintain our real incomes and therefore, it's absolutely critical." Another long-term concern remains Washington's huge trade and budget deficits, adding to a global financial imbalance that will worsen if not dealt with in the next few years. Demand for imports and more financial stability is needed in Asia to help correct imbalances. If that doesn't begin within two years, "then there are greater risks the adjustment will not take place smoothly," he added. The bank is sending mixed signals on the economy, warning of long-term risks yet predicting continued strong growth, said Doug Porter, deputy chief economist at BMO Nesbitt Burns. "Their economic models are saying one thing and their verbal commentary is saying something else." For now, the central bank figures Canada's economy has now reached its production potential with its average growth rate of 2.8 per cent for this year. That should speed up to 2.9 per cent next year - less than the 3.3 per cent annualized average previously forecast - and hit three per cent in 2007. The lowered expectation is partly due to the continued strength of the loonie, which is expected to stay in its current range of about 84 cents US to 86 cents US. It actually closed trading Thursday at 84.89 cents US, down 0.25 of a cent from Wednesday. At the same time, high oil and natural gas prices mean that the overall cost of living could pop as high as three per cent through the rest of this year, central bankers warned. However, core inflation - which strips out volatile energy and food prices and is the bank's preferred measure - will likely remain below two per cent "in the coming months." That's actually right where the central bank likes to keep it. Meanwhile, the global economy seems poised for continued strong growth averaging about four per cent per year in the next two years, because of robust economies in China and other parts of Asia. That should help offset somewhat weaker expansion in the United States. There, the Bank of Canada has trimmed its growth outlook to 3.5 per cent for 2005, down from the 3.7 per cent forecast it made last July - before the disruptive impacts of hurricane season in the southeastern U.S. Next year, U.S. growth should average 3.6 per cent next year, slipping to 3.2 per cent in 2007, although economies such as China, Japan and the European Union are expected to pick up the pace during the same period.