Bank of Canada Stands Pat

By David Dittman • June 5, 2012 • Canadian Edge Weekly

The Bank of Canada (BoC) kept its target overnight interest rate unchanged at 1 percent Jun. 5 in Ottawa and maintained its stance that it may have to boost the benchmark in response, particularly, to still robust conditions in the Canadian housing market and the willingness of Canadians to assume ever-larger debt burdens, even with modest income growth.

The BoC did acknowledge, however, “a sharp deterioration in global financial conditions” and that “risks around the European crisis are materializing.” It also noted that “risks remain skewed to the downside.” Modest US growth has been offset by emerging markets cooling at a faster rate and more broadly than the Canadian central bank anticipated.

Altogether these factors are contributing to moderation in global growth estimates, increased risk aversion and lower commodity prices. At the same time, however, “underlying economic momentum” in Canada is in line with BoC expectations.

“Housing activity,” according to the BoC’s Jun. 5 statement, “has been stronger than expected, and households continue to add to their debt burden in an environment of modest income growth. Despite external events, business and household confidence has held up and domestic financial conditions remain very stimulative.”

This is the 14th consecutive time the BoC has held its benchmark rate, the longest streak since the middle of the 20th century. The last time it moved was in September 2010. BoC Mark Carney and company are sticking with their prior position that the next move may be an increase, despite what traders in overnight interest rate futures swap markets are telegraphing.

“To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate,” concluded the BoC.

The BoC’s mandate is to keep inflation within a target range of 1 percent to 3 percent. The bank’s monetary policy is focused on keeping inflation at the 2 percent midpoint of this range.

Canada was the first Group of Seven country to adopt an inflation rate target, which it did in 1991. More than 20 central banks–including the Bank of England and the European Central Bank (ECB)–now employ this tool. Inflation in Canada has averaged 2 percent since 1991, down from nearly 7 percent in the decade and a half preceding implementation of the target.

Although the BoC’s interpretation of global conditions changed from the “improved” condition it saw when last it met on Apr. 17 to the “weakened” state it’s observed since, its position on the short-term direction of inflation is the key factor. Whereas “the profile for inflation [was] expected to be somewhat firmer than anticipated” in its January Monetary Policy Report now the BoC expects total CPI inflation “to fall below 2 percent in the short term, as a result of lower gasoline prices, while core inflation is expected to remain around 2 percent.”

The Canadian dollar strengthened against the US dollar leading up to and in the immediate aftermath of the BoC decision, trending higher Jun. 4 and Jun. 5 after weakening during seven of the previous nine trading sessions.

Signs that Europe, particularly Germany, may be opening up to broader cooperation on a fiscal plan to rescue the periphery of the common market as well as signs of new stimulative efforts from Chinese policymakers have boosted the loonie, which is widely viewed as a “risk” currency because of its connection to oil and other commodities Canada produces.

Germany continues to push Chancellor Angela Merkel’s mantra that fiscal orthodoxy and economic growth are “two sides of the same coin,” short-hand for its position that “sustainable growth cannot be bought with public spending programs, nor with state intervention or a monetary policy that is excessively lax.” But pressure from the international community–the Group of 20 will gather Jun. 18 to address this new continuing crisis– may create some give. An “official” G-20 source–the anonymous kind–told Reuters, “Countries with sound fiscal positions will be encouraged to boost spending at the G-20 level.”

This category might also include Canada: “As of now,” in the view of this G-20 official, “Germany and Canada could be seen as those having fiscal capabilities among the advanced economies.”

And the Finance Ministry of the People’s Republic of China announced Jun. 4 a plan to subsidize energy-saving appliances as part of a broader government effort to promote domestic consumption and stimulate the economy.

China will offer as much as CNY400 (USD63) for the purchase of more efficient waterheaters, refrigerators and washing machines, using “explicit fiscal subsidies” to promote the use of such appliances. Chinese consumers will be allowed to claim rebates directly from qualified sellers from Jun. 1, 2012, until May 31, 2013, according to a statement released by the Finance Ministry.

By the time you read this on Wednesday the ECB will have made its next interest rate decision; it be public as of 7:45 am Eastern time in the US. The key benchmark on the Continent is currently 1 percent. Most observers expect the ECB to hold fire at this time, opting instead to try to prod European governments to provide a solution to Spain and the still-widening financial/banking crisis. These same observers do anticipate a 25 basis point reduction sometime before the end of 2012.

Direct from Canada

US securities laws restrict participation in DRIPs sponsored by foreign companies that don’t register their offering with the Securities and Exchange Commission (SEC). Most plans of Canadian companies that do sponsor DRIPs aren’t registered under the United States Securities Act of 1933, as amended. US investors, therefore, aren’t eligible to participate.

But a handful of companies from among the 200-plus under Canadian Edge How They Rate coverage do afford US investors the opportunity to sidestep brokers and exchanges.

Companies under Canadian Edge How They Rate coverage that sponsor DRIPs open to US investors include:

Atlantic Power Corp (TSX: ATP, NYSE: AT), which listed on the NYSE in July 2010, continues to “evaluat[e] options for a Dividend Reinvestment Program” and “hopes to have this option available to shareholders in the future.”

Just Energy Group Inc (TSX: JE, NYSE: JE), which listed on the NYSE in January 2012, has a DRIP but as of yet it is not open to US shareholders.

Pembina Pipeline Corp (TSX: PPL, NYSE: PBA) completed its acquisition of Provident Energy Ltd on Apr. 9, 2012. The latter, who had been listed on the NYSE, has obviously suspended its DRIP. The former–or the now combined company–is trading on the NYSE under the symbol PBA. But Pembina Pipeline has not yet made any announcement about its intentions with regard to opening its DRIP to US investors.

Shaw Communications (TSX: SJR/B, NYSE: SJR) also hasn’t yet made its DRIP available to US investors.

We continue to track Atlantic Power, Just Energy, Pembina Pipeline, Shaw Communications and others that indicate they’re considering opening a plan to US investors, and we’ll include those that do announce they’ll sponsor DRIPs open to US investors in our regular “Tips on DRIPs” feature in the Tips on Trusts section in monthly issues of Canadian Edge.

The Roundup

Here’s where to find analysis of recent earnings reports issued by Canadian Edge Portfolio Holdings along with dates (estimated in most cases, confirmed in some) for the next release of quarterly numbers.

Conservative Holdings

Aggressive Holdings

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