Water vapour surrounds the U.S. space shuttle Endeavour during liftoff from Kennedy Space Center in Florida, its sixth bid in recent weeks to launch toward the orbiting International Space Station.BRUCE WEAVER/AFP / Getty Images
The Bank of Canada is unanimously expected to hold its target overnight rate steady today at one-quarter of a percentage point, but get ready to parse the text to determine just when the rate tightening cycle might begin.
Financial markets are leaning toward rate hikes as early as June, while economists, for the most part, expect the central bank will not begin to raise rates until July.
Regardless, interest rates do not seem to have been on the minds of currency speculators for the past few days. The Canadian dollar has eased off a little as a result of weak commodity prices and a stronger U.S. dollar, which reflects perceived stock market and euro-currency risks.
As of yesterday, "the market was pricing in 35 per cent odds of a 25 basis point rate hike on June 1 and completely pricing in a 25 per cent basis point move on July 20, with a 50 per cent odds of a 50 point move," said Michael Gregory, a senior economist with BMO Nesbitt Burns Inc. "If they really thought they had to go in June, I think they would signal that [today]" (A basis point is 1/100th of a percentage point.)
Much of the doubt arises from a jump in inflation in February to a year-over-year pace of 2.1 per cent, although economists look for that to ease to a 1.9 per cent rate when the data are released on Friday. The February spike was attributed to several one-off increases such as the rise in hotel rooms in Vancouver during the Winter Olympics and higher prices of imports as a result of the weak loonie a year ago.
How will the market react?
Although the central bank is likely to indicate regulated rates are headed higher, those looking for a June increase may be disappointed, which could take some of the steam off the Canadian dollar, said Krishen Rangasamy, an economist with CIBC World Markets Inc.
There is still substantial economic slack and the Bank of Canada could disappoint financial markets by staying put through to the end of the second quarter, Mr. Rangasamy said. "Only once in the last three decades did the Bank of Canada start a tightening cycle when the output gap was still negative, but even then, the latter was small compared to the large amount of economic slack prevailing currently."
If today's Bank of Canada policy announcement fails to resolve the issue of the timing of the rate hike, economist say Thursday's release of the Monetary Policy Report, which will deal with inflation and growth forecasts, could help clarify the issues.
But then again investors might have to wait even longer for an answer. "In all likelihood, the debate will not be settled at the April decision, with both June and July options to be left open despite a stronger economic and inflation outlook," said Eric Lascelles, chief macroeconomic strategist for TD Securities Inc. in a report to clients.