OTTAWA — Canada’s comparatively strong domestic economy and weak export-based industrial sector is presenting a quandary for the Bank of Canada as it prepares to weigh in on the surging dollar and its low-interest rate policy.
Two reports Thursday reinforced recent trends of a strengthening domestic economy propped up by floor-low interest rates and a recovering housing market, being undermined by a weak manufacturing base staggering from poor demand and a sky-high dollar
The most recent evidence is the outsized growth in house sales during the third quarter — given the still weak overall economy.
The Canadian Real Estate Association reported that in real terms, sales of existing homes in the country have never been stronger. The association said more than 135,000 units were sold in the July-to-September period — 18 per cent higher than the corresponding period last year before the recession hit.
Home sales were up in over 80 per cent of the local markets across the country as the average home price rose 11 per cent to $327,736.
“What it’s telling us is that low interest rates are working in Canada,” said CIBC chief economist Avery Shenfeld.
“We’ve had a number of disappointments on the export front. Where Canada is showing vigour, it’s on the domestic front in response to low interest rates.”
The hot resale housing market along with better new-home starts is also putting the central bank governors meeting on interest rate policy next Tuesday in a fix, says Douglas Porter, deputy chief economist with BMO Capital Markets.
“While the hot housing market cries out for rate hikes, the runaway loonie screams “No”!” he explained.
Lower rates in Canada will keep downward pressure on the Canadian dollar, while higher rates make it a more attractive currency for money traders.
The loonie cooled somewhat Thursday to below 97 cents US, but analysts expert it will reach parity by year’s end.
One respected U.S. analyst, Dennis Gartman, who was in Toronto, believes that once the loonie passes the greenback, it could stay above parity for “several years.”