Industrial capacity utilization increased only marginally from January to March in the wake of weakness in American demand and the rising value of the Canadian dollar, Statistics Canada reported Tuesday.

Industries operated at 82.8% capacity in the first quarter, up slightly from 82.5% in the fourth quarter of 2002.

Contributing to the slight increase was domestic demand, supported by personal spending and investment in residential construction.

RBC Financial says that because capacity utilization remains high the Bank of Canada will be content with holding interest rates steady rather than cutting them.

“Personal spending and investment in residential construction largely supported the slight increase during the quarter, with improvements in capacity noted in the forestry and logging, mining and electric power sectors of the economy,” says RBC.

“However, capacity used held steady in manufacturing at 84.1%, with 12 of the 21 groups in this sector posting a decline in their rate. Notable declines were in computer and electronic products, transportation equipment and machinery, which were offset by gains in fabricated metal products, non-metallic mineral products, wood products and paper.”

The firm notes that the rate is slightly lower than the 83% that markets were expecting. Nevertheless, it says, “Today’s numbers confirm that the industrial sector in Canada continues to operate at utilization rates well ahead of their American counterparts (manufacturing capacity in the U.S. was operating at around the 72.6% mark in the first quarter.) Such a relatively higher rate of capacity utilization in Canada was one of the chief reasons why the Bank of Canada engaged in a tightening stance earlier this year.”

“Granted, some headwinds on Canada’s industrial sector are blowing, notably lingering weakness in American demand and the rising value of the Canadian dollar. But the high rate of capacity utilization noted here confirms that the Bank of Canada is more likely to remain on the sidelines as the economy moves through its “soft-spot” rather than moving to an easing stance as some economic observers have suggested,” it said.

In an unrelated data release, the new housing price index moved up by 0.4% in April, slightly above the 0.3% gain expected by the market. “Although higher prices continue to underpin both the new and resale housing markets in Canada, the rate of that pricing pressures appears to be moderating. Given that the Bank of Canada has kept a close eye on the housing market and in particular the new home price index (which it notes as second tier indicator of inflationary pressure), such moderating pricing pressure should also give the Bank some room to hold-off on rate hikes in the near-term,” RBC says.