Bank hints of modest hike in interest rates

OTTAWA—The Bank of Canada is hinting that the days of super-low interest rates may be nearing an end, although it is keeping its powder dry for at least another month or so.
Despite issuing the most hawkish statement since September, 2010, the central bank’s interest-setting council decided to keep the trend-setting target rate at one percent for at least until June.

But it also issued a clear signal today it is getting impatient with leaving borrowing costs so cheap.
“In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the two percent inflation target over the medium-term,” the council wrote in an accompanying statement.
Bank governor Mark Carney recently has cited “firmer” economic conditions and his concerns that low interest rates are luring too many Canadians to borrow beyond their means.
In today’s announcement, Carney made clear that inflation is more of a concern than he previously thought, and that the economy is doing better.
Both are signals that a tightening cycle—even if a modest and brief one—is approaching.
The bank now says the Canadian economy likely will expand by 2.4 percent this year—four-10ths of a point faster than in its January forecast—and will return to full capacity in the first half of 2013, three-to-six months ahead of pace.
“Overall, economic momentum in Canada is slightly firmer than the bank had expected in January,” the bank said.
“The external headwinds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated.”
Analysts said the bank could be tipping its hand that it is thinking of a modest series of rate hikes starting this fall.
“The bank likes to give a decent heads-up on its thinking and if it is considering raising rates sometime beginning in the fall, then it wants to have the market positioned for that,” said Avery Shenfeld, chief economist with CIBC World Markets.
“I would interpret that as something on the order of three quarter-point hikes [to 1.75 percent] and then followed by another pause,” he added.
Shenfeld said nothing is written in stone, however. Much will depend on if the economy does, in fact, perform stronger this year.
He noted that Carney signalled higher rates at one point last year, only to be dissuaded when the European debt crisis flared.
According to the bank statement, the global economy also has improved and risks have moderated.
Europe is now expected to emerge from the recession in the second half of this year, the U.S. growth profile is slightly stronger, and economic activity in the emerging world is moderating but to a “still robust pace.”
Yet, Carney acknowledged the improvements are modest and risks remain.
The global economy still is under-performing and besides the usual suspects in debt-strapped Europe, he cited the high price of oil, caused by political turmoil in the Middle East, as a new risk factor confronting future growth.