Wednesday, September 16, 2009

Interest Rate Forecast

When the Bank of Canada does start raising its key policy interest rate in either late 2010 or early 2011, Canadians should brace for “aggressive” increases of up to a percentage point at a time, says a report from the Chief Economist at Laurentian Bank Securities.
The call, from Carlos Leitao, adds a new wrinkle to the debate as to whether the central bank will be able to keep its pledge to leave its key policy rate at 0.25%, or the lowest level possible, until June 2010 in an effort to stimulate the economy. This analysis kicks off a debate in terms of how aggressively the central bank needs to act once it believes rate increases are in order.
The Montreal-based economist said he believes Mark Carney, the Bank of Canada Governor, will be able to keep his June 2010 promise, based on the amount of spare capacity in the economy and continuing job losses that are likely to peak early next year. The Bank of Canada is likely to begin hiking rates after unemployment peaks (in early 2010) and before inflation hits the preferred 2% target (sometime in mid-2011). Once that period comes, Canadians should prepare for steep rate hikes.
“An aggressive tightening – rather than a gradual one – will be necessary because rates are extremely low,” Leitao said in LBS’s weekly note to clients last week. “A ‘measured pace’ would not be appropriate to ‘normalize’ rates when the starting point is virtually zero.” – Financial Post
The Bank of Canada indicated Thursday it has become more confident about the economic recovery in this country and abroad, adding growth in Canada in the second half of this year could exceed previous expectations.
But the central bank warned “persistent strength” in the Canadian dollar remained a risk to growth, and it retained “considerable flexibility” through monetary policy to deal with a high-flying currency if necessary.
The upwardly revised outlook was delivered in the Bank of Canada’s latest interest-rate statement, in which it, as widely expected, left its benchmark rate unchanged at 0.25% and said the rate is expected to remain at that level until June 2010, pending the outlook on inflation.
In its last statement in July, the central bank said a number of factors, from aggressive monetary and fiscal policies to improved financial conditions, were spurring an uptick in domestic demand, but added that a recovery was “nascent”. – Financial Post