The Bank of Canada is on course to become the first among Group of Seven central banks to begin raising interest rates, underscoring the country's enviably strong position and putting an exclamation point on a wave of hotter-than-expected data.
Central Bank Governor Mark Carney is not expected to use tomorrow's policy decision to raise his benchmark rate from the emergency 0.25-per-cent level it has been at since last April. But he is expected to signal that his year-long policy of rock-bottom borrowing costs is all but over, economists say.
The Bank of Canada's statements this week should mark the unofficial start to the next chapter in Mr. Carney's management of Canada's recovery from the recession, the worst global downturn since the 1930s though less so in Canada.
He is expected tomorrow to include his latest forecasts for inflation, economic growth and just how quickly the economy will absorb the slack left by Canada's first recession since the early 1990s. All measures could be revised up, pointing to what some observers believe could be an interest-rate hike as early as June 1, rather than July 20, the day most investors and central bank-watchers pencilled in a year ago when he pledged to keep rates on hold through mid-2010 depending on the outlook for inflation.
The central bank has seen a raft of economic data that has been stronger than expected, including Statistics Canada's February inflation report, released March 19, which showed the Bank of Canada's preferred gauge is already a hair above its 2-per-cent target - more than a year ahead of schedule. The next inflation report, for March, will be released April 23.
"We're getting into the zone here where a legitimate case could be made that holding the rate is in fact starting to come in conflict with their inflation target," Stephen Gordon, an economics professor at Laval University in Quebec City, said in an interview.
Even as Canada faces nothing like the eye-popping growth and inflation figures coming out of Asia, the economy appears well past the need for life support. Another Statistics Canada report last week showed the three quarter-long recession was not only shorter and less brutish than in other advanced economies, namely the United States and Europe, but it also was not as severe as past slumps the country has faced.
"We've had much worse recessions and much less monetary stimulus," Mr. Gordon said. "Let's say interest rates were at 1 per cent - that would still be quite a lot of stimulus in `normal' times." The private lenders that look to the Bank of Canada's stance as a guide for setting prices for mortgages, credit lines and other loans are ``pricing" in higher rates. Some of the country's biggest financial institutions have already started making mortgages more expensive, in large part because of higher bond yields that reflect expectations the central bank rate will rise more quickly than previously thought.
Securities dealers say Mr. Carney's benchmark overnight rate will be anywhere from 1.25 per cent to 2 per cent by the end of the year, according to a Reuters survey last week.
More immediately, David Watt of RBC Capital Markets said in a note, traders view the chance of the central bank moving in June as slightly more than 50 per cent.
Mr. Carney's new forecasts tomorrow, and a quarterly report two days later that will flesh them out, could prove crucial for such bets.
His inflation outlook may indicate it will be harder to achieve the bank's target over the 18-month projection period without lifting borrowing costs at his next opportunity. Or, should he maintain that the economy won't be running at full capacity until the second half of next year, rather than earlier, it would suggest he sees enough slack to leave interest rates where they are a bit longer.
That would make it easier for Mr. Carney to keep his ``conditional commitment" to hold rates through midyear, which could be crucial if he needed to use the tactic again to manage expectations and the cost of money in another crisis. In any case, with Canada's currency near parity with the U.S. dollar (which pushes down import prices) and stricter mortgage rules (which take effect today) to cool the housing market, it's conceivable the Bank of Canada isn't urgently concerned about inflation.
Even if Mr. Carney signals tomorrow that he'll hold rates through the end of June, he will likely find some way to hint that that will be the end of the line.
"This is where the transition back to a more normal monetary policy framework begins," said David Laidler, a former Bank of Canada adviser who is on the C.D. Howe Institute's monetary policy council.Report Typo/Error