Bank of Canada Forecast May Signal Rates to Rise Sooner, Slower

The Bank of Canada may signal today it plans early and slow increases in its key interest rate, two days after ending a “conditional commitment” to keep it at a record low 0.25 percent until July.

Governor Mark Carney may raise the rate to 0.5 percent at the next announcement June 1 and to 1.25 percent in October, said Meny Grauman, a senior economist at Canadian Imperial Bank of Commerce in Toronto.

“The Canadian economic comeback definitely is on track,” Grauman said. “The issue is whether we can sustain these levels” of growth, he said.

The policy report today will expand on Tuesday’s statement by giving a quarterly breakdown of its economic growth and inflation forecasts. Consumer prices will be “slightly higher” than the bank’s 2 percent target over the next year, and inflation excluding eight volatile items will “remain near 2 percent” through 2012, the rate announcement said.

The bank will probably also update its assumption for the Canadian dollar, after saying in its January report the currency would average 96 U.S. cents through 2011. The currency is now trading at around parity with the U.S. dollar, and the bank repeated this week the currency and a low volume of U.S. orders will be a drag on growth.Slower rate increases will give the bank more time to judge the recovery, said Thorsten Koeppl, assistant economics professor at Queen’s University in Kingston, Ontario.

“Big increases that are surprises usually have disruptive effects,” he said. He predicts quarter-point rate increases in June and July.

“I don’t think the bank has to raise in June but it has to raise fairly quickly once the cycle starts,” said Angelo Melino, a University of Toronto economics professor and former central bank adviser. “Anything below 2 percent smacks of emergency.”

Mark Chandler, head of Canadian fixed-income and currency strategy at Royal Bank of Canada in Toronto, told the same conference his forecast for the “terminal” level of the Bank of Canada’s policy rate is 3.5 percent by the end of next year.

www.HAMILTONHOMESINFO.ca