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December 2009

Ally

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News articles for December 2009.
 

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Central Bank may keep rates low: Dodge

The Bank of Canada could keep its benchmark interest rate accommodative through 2015 to offset fiscal restraint by the government, which must increase taxes to balance its budget, former central bank governor David Dodge said yesterday.

In point-form notes for a speech he was delivering at a business forum in Lake Louise, Alta., Mr. Dodge backed the plan by his successor, governor Mark Carney, to hold interest rates at near zero until mid-2010 but said the bank could back away from "unconventional initiatives."

With a credible fiscal plan, the overnight target rate, now at the lower limit at 0.25%, could "remain accommodative through 2015," he said.

The rate could rise to 2% in 2010-11 but stay below neutral for the rest of the period, he said, to compensate for the "fiscal drag and continuing [small] output gap," Mr. Dodge wrote in his notes.

Mr. Dodge, governor until January 2008 and now a senior advisor at Bennett Jones LLP, said any credible plan to eliminate the federal government`s fiscal deficit by 2015 would likely include tax increases.

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Little or no impact here, Flaherty says

The Group of Seven countries has discussed the potential fallout on the global financial system from Dubai`s delayed debt payments, federal Finance Minister Jim Flaherty said yesterday.

Speaking to reporters, Mr. Flaherty said the federal banking regulator sees little or no impact in Canada from Dubai`s request for a standstill on payments of tens of billions of dollars of debt owed by conglomerate Dubai World, a move that has sparked debt default fears that have rattled global markets.

"There have been discussions and we`re monitoring the consequences of the credit issue relating to Dubai World," Mr. Flaherty said when asked if the G7 would issue a coordinated statement to quell currency volatility stemming from developments in Dubai.

Japan`s finance minister raised the prospect of a joint statement on currencies after the U.S. dollar tumbled to a 14-year low against the yen yesterday.

Mr. Flaherty said he was monitoring the situation closely, together with international colleagues and those at home.

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The Wise Rich know about risk

You can`t manage what you can`t measure. Thoughtful wealthy investors have learned this adage applies to managing investment capital as much as it applies to running a business. If meaningful benchmarks and other investment measures aren`t defined at the outset, managing the family money can turn into an emotionally driven series of ad hoc actions and reactions that almost guarantee unwelcome costs and taxes on top of disappointing returns.

Capital preservation is the No. 1 goal of the wealthy; the pain of sliding down the lifestyle ladder is infinitely greater than the pleasure of climbing it. Hence, serious investors focus first on risk by defining acceptable downside measures. In a recent discussion I had with a savvy family on the design of their portfolio, their concern was setting the level of volatility they would be comfortable with and identifying the reasonable worst-case loss the portfolio could suffer in a serious bear market.

Maximum exposure to any single manager is another important risk measure. When I worked in Los Angeles, one of my partner`s friends was a billionaire who had to cut back his investment with a famous hedge-fund manager to keep within his exposure limits. Although this can be difficult to do when times are good, it paid off: Over the past two years, this particular manager reportedly suffered deep, painful losses.

Liquidity is another key risk metric. Investors should specify how much cash they need to keep on hand and what portion of their portfolio can be allocated to illiquid investments or funds that can suspend redemptions.

Absent specific risk parameters, it is easy to fall into the trap of letting the latest hot sector or manager become the implicit measure of success. I have talked to many investors who gradually took on more portfolio risk as they added more micro-and small-cap stocks and funds to their portfolios in 2006 and 2007. They were lured in by sizzling returns. The nearly 80% decline in the S&P/TSX Venture composite index from its peak in 2007 to the spring of this year was a pail of cold water that awakened them to the true level of risk they had assumed.

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Buyer beware on Snowbird deals

A one-bedroom condo in Waikiki for US$50,000 or less? Yes. You could buy a number of such condos here in the famous vacation destination for that price. With $5,000 down, the principal and interest on the 30-year amortization mortgage that is popular in the United States would cost you US$269 a month.

Too good to be true? Well yes and no.

No, because that is the actual sale price for a 448-square-foot condo in a small development close to the beach. The development is decidedly unfashionable but does have a pool.

Yes, because the condo is leasehold, meaning that you don`t actually own the land on which your condo is situated. And with the lease winding down, you will be paying hundreds of dollars a month to lease that land, a cost that will go up as the end of the lease nears. Meantime, your taxes, condo fees and mortgage will bring your monthly outlay to about US$1,350 for what is a depreciating asset, above what you might pay in rent for similar accommodation.

Strange anomalies aside, snowbirds and others are being drawn to vacation properties in the sun by the alluring combination of a stronger Canadian dollar, low interest rates and low, low real estate prices in places such as Florida, Nevada, California, Arizona and Hawaii.

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Conrad Black: A Teaming Rainforest of Irrelevant Climate claims

Till now, I have avoided more than very limited comment on the whole global-warming-carbon emissions controversy. But now that colossal spending and regulating programs impend on these issues, I must say that the Al Gore-David Suzuki conventional-wisdom hysteria is an insane scam.

The basic relevant facts are that carbon emissions are not the principal factor in global warming, and despite dire contrary forecasts and ever-increasing carbon-emissions in the world — especially as the economies of China and India, representing 40% of the world`s population, expand by six to 10 percent each year — the world has not grown a millidegree warmer since the start of this millennium. And its mean temperature rose by only one centigrade degree in the 25 years before that. The greenhouse effect of carbon dioxide emissions does have a gentle warming effect if it is not counteracted by unpredictable natural phenomena, but cannot be measured directly against the volume of such emissions.

The chief source of apparently informed hysteria on this subject, the Intergovernmental Panel on Climate Change (IPCC), has estimated that the mean world temperature will increase by between 1.8 degrees C and 4 degrees C in this century, although a tenth of that warming has already failed to occur in the last decade. But even this prediction does not remotely justify all the cant and hype that the end of the world is nigh.

Even the IPCC admits that the upper end of its forecast would, in fact, substantially increase world food production. There is no chance of achieving stated — or even (by some countries) committed — emission-reduction targets, nor any reason to believe that the attainment of these targets would accomplish anything useful. Yet the president of the United States has been promising radical progress toward an international covenant in Copenhagen next month to spend trillions of dollars in pursuit of this unattainable, undesirable target.

It would be infinitely more sensible to intensify research, and invest where necessary or advisable in mitigation, adaptation and geostrategy, such as the infusion of sulphates into the stratosphere, as happens naturally with volcanic eruptions, to reduce the intensity of the sun and provide countervailing cooling influences without thinning the ozone layer. We should keep in mind that the IPCC`s worst case in its preferred (very negative) scenario is that in the next hundred years, living standards in what is now the developing or under-developed world will improve by only 750%, instead of the 850% improvement that would allegedly occur if the world`s temperature remained constant, as it has in the last decade.

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Canada Home Prices may rise 10% in 2010: Report

TORONTO (Reuters) - Canadian home-resale prices are likely rise in 2010 at an even faster pace than this year but a dangerous bubble probably won`t develop, TD Economics said in study published on Tuesday.

The average price of an existing home in Canada is expected to surge 9-10 percent next year to about C$346,000 as sales climb to 475,000. In 2009, the average price rose an estimated 4-5 percent on an annual basis.

But the sales momentum, which TD expects will last six to 10 more months, should not translate into a "bubble" as the cost of ownership, when lower interest rates are taken into consideration, has fallen in recent months.

The residential housing market froze late last year in the wake of the global financial crisis, but its swift recovery has prompted some concern about the chances of a sudden collapse. Sales of existing homes rose to a record monthly high in October.

TD described the Canadian market`s downturn and subsequent recovery "as V-shaped as can be." It partly attributed the rebound to pent-up demand after last year`s slump.

Over the next few years, sales growth should moderate as more supply comes into the market and interest rates rise, TD said in its resale housing outlook report.

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Employment jumps by 79,000 in November

OTTAWA — The Canadian economy gained a surprising 79,100 jobs in November, with the unemployment rate easing 0.1 percentage points to 8.5 per cent, Statistics Canada reported Friday.

"Almost all the employment growth in November was attributable to the service sector (up 73,000), especially educational services," the federal agency said. "With November`s increase, employment in the service sector is back at its October 2008 level, while employment in the goods sector remained well below (down 324,000) where it was at that time."

Most economists forecast 15,000 new jobs would be added during the month. The November number followed a surprise loss of 43,200 positions in October, which was the first decline in three months, and sent the jobless rate to 8.6 per cent in October.

"The Canadian economy is in recovery mode," said BMO Capital Markets economist Jennifer Lee.

Statistics Canada said full-time employment increased by 39,000 in November, the third consecutive monthly increase. Part-time employment rose by 40,000, following two months of declines. Most of the new jobs were in the service sector, up 73,000, led by educational services.

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Housing Sales across Canada set to reach new Highs

TORONTO - November housing sales across the country are set to reach new highs based on fresh data from the country`s two most expensive markets.

The national numbers from the Ottawa-based Canadian Real Estate Association are not due out until mid-December but the Toronto Real Estate Board said yesterday it had its best November on record. Toronto`s news came on the heals of a Wednesday release from the Real Estate Board of Greater Vancouver that said sales activity in the city rocketed up 252.7% in November from a year ago.

What the latest numbers will likely mean is an improvement in the national average sale price, which was up 20% in October from a year ago — the largest such increase in two decades. The two cities tend to skew the national average price up or down, based on levels of sales activity.

"You are going to see a very strong national number. It will be another double-digit increase for sure," said Benjamin Tal, senior economist at CIBC World Markets. "You have to remember you are comparing all this against a very low base. Last year at this time we were talking about 1929. This was a dead market."

In November 2008, the greater Vancouver area had a meagre 874 sales. This November that figure was up to 3,083. But there are some indications the temperature in the red-hot housing market is dropping; Vancouver November sales were down 16.8% from October, although the numbers are not seasonally adjusted.

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Re/Max says Housing Market recovery to accelerate in 2010

MISSISSAUGA, Ont. - Residential real estate sales should recover in almost all major Canadian cities by the end of 2009, while average prices should post new records in an improved economic climate, according to a new housing report.

The Re/Max Housing Market Outlook survey for 2010 predicts the uptick in sales will be lead by an anticipated 45 per cent increase in Greater Vancouver, while Ottawa and Quebec City are expected to hit historic highs in the number of homes sold.

The report also says average prices are expected to improve in 65 per cent of markets as economic performance picks up.

Eighty-three per cent of markets are expecting sales to increase over 2009 levels while housing values are predicted to rise in 91 per cent of Canadian centres in 2010. The remaining markets are predicted to match 2009 levels.

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Canada November Job gains beat expectations

OTTAWA (Reuters) - Canada`s economy added far more jobs than expected in November, more than erasing the losses in October and suggesting stronger fourth-quarter growth as predicted by the Bank of Canada.

Statistics Canada reported on Friday a net employment gain of 79,000 in November, beating analysts` expectations of a 15,000 gain. The unemployment rate edged lower to 8.5 percent from 8.6 percent in October.

"It`s all good. Obviously the headline was a shocker. Some of it came in the part-time and it was a bit of a bounce from the previous month. But most of the details were supportive," said Mark Chandler, head of fixed-income and currency strategy at RBC Capital Markets.

The Canadian dollar rose to C$1.0458 to the U.S. dollar after the report from around C$1.0530 just before the data was released.

Analysts said the strong details in the report point to a pickup in economic growth in the fourth quarter after a tepid 0.4 percent annualized growth rate in the third quarter, the first rise after a recession lasting three quarters.

Still, the Bank of Canada is likely to hold its benchmark interest rate at an all-time low of 0.25 percent at its next meeting on December 8. It is also expected to stick to its pledge to keep rates there until at least the end of June, conditional on inflation staying on track.

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Canada to lead G7 in 2010 Recovery: RBC

OTTAWA — Although Canada experienced a deep recession for most of 2009, the country is now expected to lead the G7 in economic recovery next year, according to a report released Monday by RBC Economics.

After contracting at an average rate of 2.5 per cent this year, gross domestic product is expected to rise 2.6 per cent in 2010 as stimulus spending reaches its peak, RBC said. GDP is forecast to jump to 3.9 per cent in 2011.

"While challenges remain, a peak in stimulus and infrastructure spending across the federal, provincial and municipal governments, along with low interest rates, should result in a sustained recovery," said Craig Wright, senior vice-president and chief economist at RBC.

"The price tag for the stimulus is high with large budget deficits, but it is still lower, relative to GDP, than the peaks reached in the early 1990s."

The RBC forecasts outpace those of the Bank of Canada, which expects growth of three per cent in 2010 and 3.3 per cent in 2011.

RBC said all provinces are expected to post growth next year, but Saskatchewan will be leading the Canadian recovery, with 3.9 per cent growth in GDP in 2010, followed by 4.6 per cent growth in 2011, as demand for its valuable resources returns to pre-2009 levels.

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Jobs Rebound sparks speculation of rate hikes

OTTAWA -- The stunningly strong November jobs data from Canada and the United States has kicked off a fresh round of speculation as to when the two countries` central banks will begin hiking their key interest rate from historic lows.

Short-term bond yields rose in both countries on the impressive payroll data, while the U.S. dollar had its strongest day since June on anticipation that the U.S. Federal Reserve might be closer to a rate increase than people realized.

"The day is nearing when the Fed will have to make good on its plans for an exit strategy," Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi UFJ in New York, told Reuters. "We`re almost back to normal. The economy is lifting at a much greater rate than expected."

In Canada, data Friday indicated the economy added 79,100 jobs in November, compared to expectations of a 10,000 gain. Further, the data revealed the biggest monthly increase in private-sector payrolls, of 56,900, since January of 2008.

As impressive was news from the United States. After 21 consecutive months of recording job losses of at least 100,000 or more, the U.S. economy shed only 11,000 jobs in November. Analysts had expected a payroll reduction of 125,000 for November.

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Growth to spike 4% this quarter, Economists predict

OTTAWA -- The Canadian economy will make up lost ground this quarter with annualized growth that`s expected to surpass the 4% level, while robust domestic demand will make it "increasingly difficult" for the Bank of Canada to keep its pledge on interest rates, a pair of economic forecasts from two of the big banks said Thursday.

The forecasts, by Toronto-Dominion Bank and National Bank Financial, project steady growth for the Canadian economy next year and 2011 but not at a pace expected following a recession as deep as the one just passed. Both anticipate the global economy to expand next year at a roughly 4% pace, with the emerging economies contributing most of the drive. (NBF estimates that China and India, combined, would contribute 1.5 percentage points to its projected 4% global growth.)

The Canadian recession ended in the third quarter, when the economy eked out a 0.4% annualized gain for the period, well below expectations. However, economists at TD indicate fourth-quarter output is going to surprise on the upside, with 4.1% growth. (The Bank of Canada has projected 3.3% expansion for the final three months of the year.)

"While the start to the Canadian recovery was much more subdued than many were expecting – and significantly slower than in the U.S. – the headline number masked some underlying strength, as almost every sector in the Canadian economy was on the mend in the third quarter," the TD forecast said.

The recent strength in the labour market – a surprising addition of 79,200 jobs in November -- provides "good reason to believe that the economic engines were moving full steam ahead," it added.

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Home Sales Jingling Along

The first week of December was a good week, economically speaking, for the Greater Toronto Area and Canada more broadly. We had two waves of positive financial news. First, Statistics Canada announced the Canadian economy grew in the third quarter --the first quarter of growth since the third quarter of 2008.

This was followed by encouraging employment numbers. In Canada, a whopping 79,000 jobs were created in November and the unemployment rate dropped slightly. In the Toronto area, we experienced the fourth straight month of job creation. This was the backdrop for another strong report from the Toronto Real Estate Board. November`s existing home sales in the Toronto area were up strongly on an annual basis to 7,446 (up 105% from a depressed November 2008, but within 2% of the total in November 2007), and the average home price climbed 14% to $418,460.

Jason Mercer, TREB`s senior manager of market analysis, points to the strong link between the housing market and renewed growth in the economy: "Economic recovery to date has been consumer driven, with housing playing a key role. The fact that the GTA housing market has remained affordable over the past decade, coupled with record low mortgage rates, meant that as consumer confidence recovered, home ownership demand rebounded very quickly. These transactions resulted in spending that benefited other sectors of the economy, including such financial and professional services as mortgage brokers and lawyers, renovation and repair contractors, moving and storage companies and home furnishings retailers to name a few."

By all accounts, when the final resale numbers are released for December, total sales will likely align with the healthy results we had in 2004 through 2006. This will represent quite a recovery from the lows in sales and price we hit at the beginning of the year.

With that said, however, it is important to point out we will not see sustained double-digit rates of growth in sales and average price moving forward.

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Canadian House Prices lofty, but rates to stay frozen

Canadian house prices have soared in the past decade and, despite the hiccup at the start of the recession, low interest rates have helped prices to continue to increase. Scotiabank economists said in a report that the run up in prices needed to be watched carefully because it could develop into a bubble. However, they said conditions did not warrant an interest rate increase just yet and that the pace of price increases would likely cool in about two to four years.

"Canadian house prices are rich no matter how one looks at it, but they are likely to become richer yet before material risks emerge later next year and beyond," economists Derek Holt and Karen Cordes said in the report.

There are a number of ways to look at house prices. Canadian Real Estate Association data on homes sold through the Multiple Listing Service shows that the average resale price has more than doubled this decade. Statistics Canada`s new home price index has also risen by about 50% this decade. Canadian Teranet resale prices as of August have increased 86% this decade.

"All three Canadian measures point to lofty valuations," the economists said. "If analysts were worried about Canadian house prices over 2007-08, it would be inconsistent to suddenly no longer believe them to be in lofty territory today especially insofar as the outright resale segment is concerned."

To compare house prices to the broader economy, Mr. Holt and Ms. Cordes adjusted the increases to account for inflation, which resulted in a 70% rise so far this decade. Another alternate measure, comparing house prices with rental costs, was at a record high, while price-to-income was also elevated.


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Trade Surplus returns

OTTAWA - Canada unexpectedly returned to a trade surplus in October after three months of deficits as exports to the United States picked up steam and shipments of precious metals hit a record high.

Statistics Canada said yesterday the trade surplus in October totalled $428-million. An analysts poll had forecast a $700-million deficit, while trade deficit in September was $850-million. Exports of precious metals rose 34.0% to a record high of $1.3-billion.

"Worldwide surges in gold prices and in the demand for gold bars fuelled the rise," Statistics Canada. Exports of copper ores and of other crude non-metallic minerals also posted solid gains in October.

"This should provide some support to real GDP in the fourth quarter, although we should start to see some import growth over the next few months as the Canadian economy gains strength," said Scotia Capital economists Derek Holt and Karen Cordes.

The economy just managed to wriggle out of recession in the third quarter with annualized growth of just 0.4% disappointing markets.

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Canada`s Headline Inflation Rate rises to Eight-Month High

The consumer price report for November showed that overall prices rose 0.5% in the month, with the year-over-year rate rising to 1%, marking an eight-month high. Forecasters were looking for the index to post a 0.3% monthly gain. The Bank of Canada`s core measure, which removes the eight most volatile components, rose 0.4% in November, double the pace expected by forecasters. Compared to a year ago, the core inflation rate stood at 1.5%. The slowing in the year-over-year rate was the result of the monthly increase falling short of the 0.7% surge reported in November 2008. Last year`s monthly increase was due to sharp increases in the prices to purchase or lease passenger vehicles.

The 0.5% monthly rise in the index was the result of rising gasoline prices (3.2%), passenger vehicle prices (5%), other fuel costs and fresh vegetable prices (up a whopping 16.3%). Declining air transportation costs (-11.3%), traveller accommodation (-7.1%), mortgage interest and insurance costs moderated the monthly increase. On a seasonally adjusted basis, the index rose 0.6%, the fourth consecutive monthly increase.

On an annual basis, it was the swing in energy prices that made the largest contribution to the rise in the headline inflation rate. Prices were 14.1% higher than year-ago levels, a switch from the prior 12-month period when this component recorded year-over-year declines. Natural gas prices conversely were 29.7% below November 2008 levels. Insurance premiums, property taxes and education costs also contributed to the year-over-year rise in the headline inflation rate. Lower prices of mortgage interest costs, homeowners` replacement costs, air transportation and vehicle prices all weighed on the overall inflation rate.

Canada`s headline inflation rate moved soundly into positive territory after a six-month period of negative or negligible inflation readings as the deflationary pressure coming from lower gasoline prices reversed course. We expect that the headline inflation rate will trend higher in the months ahead, although it will likely remain below the Bank of Canada`s 2% target for most of 2010.

The Bank of Canada`s core measure has been stickier than expected throughout the recession and averaged 1.8% in the year to October. Even the November print was higher than the 1.3% expected by forecasters. The decline in the November core inflation rate was largely a reflection of base effects but, with so much excess capacity in the economy, the rate is likely to remain below the 2% medium-term target. Signs that the economy has emerged from recession and labour market conditions have improved did not sway the Bank of Canada when policymakers met in early December. Rather, they deemed that risks to the inflation outlook remained tilted slightly to the downside and maintained their conditional commitment to keeping the overnight rate steady until the end of the second quarter of 2010.

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Canada`s Government will punture any Housing Bubble: Finance Minister

OTTAWA — The federal government is ready to clamp down further on mortgage rules if the boom in the Canadian housing market turns into a bubble, says Finance Minister Jim Flaherty.

In an exclusive interview with Canwest News Service and Global National, Flaherty said the government is closely monitoring the red-hot housing market for signs that it is reaching "irrational" levels.

"The reality is we have low mortgage rates … so we can expect some upward pressure on housing," he said. "That`s OK, as long as it doesn`t become a bubble. We`re watching that."

If necessary, the government is prepared to further tighten the conditions under which the Canada Mortgage Housing Corporation insures mortgages, the finance minister said.

In July 2008, amid the fallout from the subprime mortgage crisis in the United States, the Finance Department announced that CMHC would shorten the maximum amortization period that it will accept to 35 years from 40, as well as require a down payment of at least five per cent of the value of the home. The new rules, which came into effect in October 2008, effectively made it more difficult for prospective homeowners to receive government-backed mortgages.

"If we have to, we`ll do what we did last year and limit the rate of amortization further than we already did, and require higher down payments," said Flaherty.

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Rates may go up early in New Year

Robust domestic demand and an improving labour market will make it "increasingly difficult" for the Bank of Canada to honour its pledge to keep its benchmark interest rate at an historic low until the end of June, National Bank Financial said yesterday in its semi-annual outlook.

In fact, NBF has indicated the central bank might begin raising its target rate, at 0.25%, in early 2010, all the way to 1.5% by the end of next year.

"Obviously, the difficult part of the Bank of Canada`s exit strategy will be deciding when to raise the official rate and at what pace," said the NBF team, led by chief economist and strategist Stéfane Marion. "Pressure to begin normalizing monetary policy before mid-2010 could well mount. In particular, sustained employment recovery would spell an end to the ultra-expansionist monetary policy ahead of plan."

The timing of the Bank of Canada`s first interest rate hike since July 2007 is generating much discussion among economic circles. So is how aggressive the central bank will be in an effort to bring borrowing costs from an emergency level to what analysts call "historically accommodative."

The prevailing wisdom is that the central bank will keep its target rate at a record low through June 2010, as the Bank of Canada has pledged to do on the condition inflation returns to its preferred 2% target in late 2011.

The latest inflation data, for November, was released yesterday, and it came in at the high end of expectations. Prices rose at their fastest pace in eight months, climbing 1% on a year-over-year basis. Core inflation, which strips out volatile items, rose 0.4% month-over-month, resulting in an annual increase of 1.5%, slightly above central bank expectations.

"Underlying inflation remains a bit hotter than the Bank of Canada expected — while it`s hardly a source of concern … it makes that much more of a case that normal interest rates will return before too much longer," said Douglas Porter, deputy chief economist at BMO Capital Markets.

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