Analysts agree: Interest rates to rise by July

Analysts agree: Interest rates to rise by July
Economy expected to grow 3.3% this year, inflation creeping up
 
By Jennifer Kwan, Reuters
April 16, 2010 

Most of Canada's primary securities dealers predicted Thursday that the Bank of Canada will raise interest rates in July as the high-flying loonie gives it some wiggle room even as the economy picks up steam.

In a Reuters poll conducted Thursday ahead of next week's interest-rate decision, all 12 of Canada's primary dealers said they expect the bank to leave rates unchanged on April 20, its next policy announcement date.

The central bank will raise rates sometime this year. Three of them said that will be in June, before the expiration of its conditional pledge to keep its key rate at its current ultralow 0.25-per-cent level.

Eight expected the central bank to begin raising the overnight rate in July. One sees the first move in September.

The strength in the currency gives the bank some flexibility to refrain from a rate hike, market watchers say.

"We think the strengthening economy will spur the bank to begin renormalizing policy by the summer, yet because the Canadian dollar is rising that will tend to delay the interest-rate increases until July," said Sal Guatieri, senior economist at BMO Capital Markets.

"The higher Canadian dollar will slow exports and draw in more imports and as well act as somewhat of a break on inflation, so that suggests that the Bank of Canada does not need to raise aggressively."

The dollar closed above parity with the U.S. currency this week for the first time since May 2008, powered by rising commodity prices and an economic rebound that investors expect will soon push the bank to raise rates.

In April 2009, the bank pledged to keep the rate at the record-low level until at least the end of June as long as inflation remains in check. Recent data showed Canada's annual core-inflation rate unexpectedly rose above two per cent in February, which pushed the dollar higher and provided more impetus for the Bank of Canada to raise rates

A recent Reuters poll predicts the Canadian economy will grow 3.3 per cent this year. Reports this week showed stronger-than-expected trade figures for February. A Bank of Canada survey showed businesses upbeat about hiring intentions and expansion, and the three-month trend for housing starts displayed strength.

The strong data have led a minority of economists to believe the bank should tighten before the end of the quarter.

"It's a conditional commitment. Since they put that commitment in place the strength of the Canadian economy has surprised the Bank of Canada and many forecasters by being stronger than people were expecting," said Paul-Andre Pinsonnault, senior fixed-income economist with National Bank Financial.

"We've also had more inflation than what the bank was forecasting initially. When you put the two together the bank would be well justified to start to raise rates earlier than what they had said."

Despite this, most market watchers expect the central bank to keep its conditional pledge.

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