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Tuesday, September 7, 2010 - Bank of Canada Expected to Freeze Rate Hikes

CBC News Online
Tuesday, September 7, 2010 | 12:41 PM ET

The Bank of Canada should boost interest rates one more time on Wednesday and then could leave rates alone for as long as a year, according to many economists.

That is because Canada's domestic financial strength is getting offset by a quickly flagging U.S. economy, reducing the necessity of raising borrowing costs on this side of the border.

"Even if the BOC ultimately pulls the trigger on Wednesday, it is likely to be the last rate hike for a while," said Derek Burleton, deputy chief economist at TD Bank Economics.

Rising rates
The Bank of Canada is widely expected to increase its well-followed target rate on Sept. 8 — the next regularly scheduled meeting of the bank's governors — to one per cent, up from the current 0.75 per cent.

Canadian interest rates are set to rise to one per cent on Wednesday Bank Governor Mark Carney has long signaled the need to hike national borrowing costs in order to rein in economic activity and reduce inflationary pressures.

But now, economists believe the central bank will hold rates steady at one per cent after Wednesday's boost.

TD is forecasting the bank's rate at one per cent until at least the second quarter of 2011.

The Bank of Montreal figures Canada's one per cent interest to last even longer, until the July-to-September period in 2011.

American stumble
In recent months, the U.S. economy appears to have been lurching toward a double-dip recession in the eyes of many analysts.

And such a scenario would spell trouble for Canada's largest trading partner.

In the U.S., slowing gross domestic product growth, stubbornly high unemployment and a sagging real estate sector have all combined to act as a millstone on recovery.

U.S. economic activity has slowed in recent quarters, hurting Canadian export potential. (Rainier Ehrhardt/Associated Press)
RBC Economics has tagged U.S. consumer spending to decline over 2009 by 1.2 per cent while the forecaster expects the unemployment rate to decline by only half-a-percentage point in the fourth quarter of 2010 compared to the same period one year earlier.

"The U.S. economy lost momentum during the summer months, causing the Fed to contemplate the prospects for further easing," said Michael Gregory, senior economist at BMO Economics.

More pump priming
Of course, with an interest rate basically at zero, the U.S. Federal Reserve has been eyeballing more exotic instruments, such as buying back more toxic debt assets from chartered banks, to help the overall economy.

In addition, U.S. President Barack Obama just announced a $50 billion US stimulus spending package in a bid to generate more private sector economic activity, heading into the Christmas quarter.

Canadian hawks
While many Canadian analysts agree with the "one hike, then stop" theory of the Bank of Canada, some believe the central bank should increase rates more aggressively.

Canada and Australia are the only major industrialized countries to increase interest rates in 2010.

Still, the C.D. Howe Institute's monetary policy committee has called upon Carney to hike rates faster and higher than Bay Street might want.

"Members who favoured more rapid increases in the overnight rate and higher targets in 12 months’ time tended to emphasize Canada’s position among countries less damaged by the crisis ... where returning policy rates to levels consistent with longer-term stability in inflation is more appropriate," said the Toronto-based research institute in its September missive on bank policy.

The committee said the Bank should boost interest rates to 1.5 per cent by March 2011 and 2.25 per cent by next September.

Interestingly, the most hawkish of the C.D. Howe's economists were all academics who argued for three per cent interest rates in 2011


Read more: http://www.cbc.ca/money/story/2010/09/07/bank-of-canada-rate-lookahead.html#ixzz0ysla8lXK

posted in News at Tue, 07 Sep 2010 21:42:25 +0000



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