Rates may go up early in New Year
Robust domestic demand and an improving labour market will make it "increasingly difficult" for the Bank of Canada to honour its pledge to keep its benchmark interest rate at an historic low until the end of June, National Bank Financial said yesterday in its semi-annual outlook.
In fact, NBF has indicated the central bank might begin raising its target rate, at 0.25%, in early 2010, all the way to 1.5% by the end of next year.
"Obviously, the difficult part of the Bank of Canada`s exit strategy will be deciding when to raise the official rate and at what pace," said the NBF team, led by chief economist and strategist Stéfane Marion. "Pressure to begin normalizing monetary policy before mid-2010 could well mount. In particular, sustained employment recovery would spell an end to the ultra-expansionist monetary policy ahead of plan."
The timing of the Bank of Canada`s first interest rate hike since July 2007 is generating much discussion among economic circles. So is how aggressive the central bank will be in an effort to bring borrowing costs from an emergency level to what analysts call "historically accommodative."
The prevailing wisdom is that the central bank will keep its target rate at a record low through June 2010, as the Bank of Canada has pledged to do on the condition inflation returns to its preferred 2% target in late 2011.
The latest inflation data, for November, was released yesterday, and it came in at the high end of expectations. Prices rose at their fastest pace in eight months, climbing 1% on a year-over-year basis. Core inflation, which strips out volatile items, rose 0.4% month-over-month, resulting in an annual increase of 1.5%, slightly above central bank expectations.
"Underlying inflation remains a bit hotter than the Bank of Canada expected — while it`s hardly a source of concern … it makes that much more of a case that normal interest rates will return before too much longer," said Douglas Porter, deputy chief economist at BMO Capital Markets.
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