“Since the April Monetary Policy Report (MPR), economic developments have been broadly in line with expectations. However, the balance of risks to the Bank’s April projection for inflation in Canada has shifted slightly to the upside.”

With that statement, the Bank of Canada (BoC) left its key rate unchanged at 3 percent, flummoxing economists who forecast a 25-basis-point cut. The consensus focused on recession worry rather than the impact of rising prices, but the BoC cited higher energy costs as offsetting the impact of weaker demand on inflation. That makes current monetary policy “appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 percent inflation target.”

If current levels of energy prices persist, the consumer price index could rise above 3 percent later this year, the BoC said.

Despite lower US demand for Canadian goods and services, global growth has been stronger and commodity prices have been sharply higher than expected, it said. But “the risk remains that potential growth will be weaker than assumed.”

“[W]ith the decline in first-quarter GDP, the Canadian economy is judged to have moved into excess supply,” suggesting core inflation will remain below 2 percent through 2009, then inch up in 2010.

The BoC expects Canada’s economic growth to pick up this year and accelerate in 2009, owing in part to a firming of US demand.

The BoC’s stand-pat move is a signal of the emergence among the world’s central banks that inflation is a big worry. Evidence of a recession in the US continues to emerge (see below); but among the major economic players, it’s all about inflation now, less about growth. Tuesday’s decision aligns the BoC more fully with other leading central banks.

US Federal Reserve Chairman Ben Bernanke said Monday night that US inflation risks were increasing while the danger of an economic slump had abated, stoking expectations for higher interest rates. In remarks prepared for a speech at the Boston Fed’s annual conference, Bernanke played down the biggest jump in the unemployment rate in 22 years in May:

 “Although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.

“The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations. The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation.”  

European Central Bank President Jean-Claude Trichet yesterday repeated that policymakers in the 15-nation euro area may raise their benchmark rate a quarter point to 4.25 percent to combat the fastest inflation in 16 years.

Keep on Chooglin’

Well, it’s not exactly the “good time” John Fogerty and Creedence Clearwater Revival sang of, but things up north remain relatively stable. Employment numbers and wage growth continue to bring comfort, and a recent pickup in housing construction activity provided some upside surprise.  

Following two months of small increases, employment in Canada was unchanged in May 2008. According to Statistics Canada, the unemployment rate remained at 6.1 percent. Over the past 12 months, employment has risen by 339,000, or 2 percent. Despite slower employment growth in recent months, the participation rate remained at its record high of 68 percent in May.

In May, the average hourly wage was 4.8 percent higher than a year earlier, and well above the most recent increase of 1.7 percent in consumer prices. Since September 2007, year-over-year increases in average hourly wages have exceeded 4 percent.

Canadian new home starts rose a greater-than-expected 3.5 percent in May from the previous month, led by a gain in single-family dwellings. The total of 221,300 units on an annualized basis compares with 213,900 units in April, according to Canada Mortgage and Housing Corp (CMHC).

Canada’s housing market remains “healthy” because of low unemployment and rising wages, and because banks in the country offered fewer of the subprime mortgages that roiled the economy in the US, CMHC said. Still, the housing agency said Canadian home starts will fall 6 percent this year because of higher mortgage interest costs.

Urban single-family home construction rose 7.3 percent to 76,700. The pace of multiple housing starts in cities rose 1.9 percent to 116,100 units in May, CMHC said.

More “Why Two Consecutive Quarter of Declining GDP” Is Lame

Our favorite financial blogger Barry Ritholtz points us to a post by Floyd Norris of The New York Times; “A Perfect Recession Indicator” makes no mention of the mainstream media’s favorite shorthand definition.

Ode to Dion

Neither cowardly nor spineless, this man is most certainly a mule,” wherein Aaron Wherry of venerable Canadian weekly Maclean’s blogs about a day with the Liberal Party leader, replete with meaningless moral victories over third-team bickerers…and surrender on a consequential immigration amendment to the budget implementation bill, meaning Stephen Harper and his minority government endure. Again.

For more on these topics and other newsworthy items, visit our blog, At These Levels.

Speaking Engagements

“The coldest winter I ever spent was a summer in San Francisco,” a saying that’s almost a San Francisco cliche, turns out to be an invention of unknown origin, the coolest thing Mark Twain never said.

The natural setting is, however, among the most exciting in the US. Venture west for the San Francisco Money Show Aug. 7-10, 2008, and conduct your own field study.

Neil George, Elliott Gue and I will discuss infrastructure, partnerships, utilities, resources and energy, and tell you what to buy and what to sell in 2008.

Click here or call 800-970-4355 and refer to priority code 011362 to attend as our guest.