Interest rates on the rise...
Courtesy of Financial Post- April 21, 2010
By Paul Vieira
The Bank of Canada signalled Tuesday it is about to bring its era of record-low interest rates to a close.
In a decision that sent the Canadian dollar up more than 1.5 cents US, the bank ditched its conditional pledge to keep rates at 0.25 per cent until July, saying the recovery is proceeding more rapidly than expected, housing activity is "very strong" and inflation is expected to be stronger than previously anticipated. "With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus," the bank said.
In the depths of the financial crisis a year ago, the bank pledged to keep rates at 0.25 per cent until July, conditional on the outlook for inflation.
While most Bay Street economists expect the bank to begin raising rates with a traditional quarter percentage point increase, some said a half-point hike was a possibility.
"Removing the conditional commitment ... [is] as good as cementing a June 1 hike," said Derek Holt, vice-president of economics at Scotia Capital. "That leaves open the debate over whether 25 basis points or 50 basis points is likely."
A Reuters poll of Bay Street dealers forecast the overnight rate would range from 1.25 to two per cent by year's end. That reflects either a "steady diet" of 25-basis-point increases until the end of the year, as HSBC economist Stewart Hall expects, or one-shot 50-basis-point moves later in the year.
Brian Bethune, chief Canadian economist at IHS Global Insight, said the dollar's strength is likely to limit the Bank of Canada to one "token" rate hike of 25 basis points, and then wait until the U.S. Federal Reserve begins to bump up rates.
"I think the reality is they aren't going to need to raise rates that much," he said, "because with the Canadian dollar shooting to parity again, that's a significant deflationary force."
An increase would make Canada the first G-7 country to begin raising rates.