JOHN WARD
Canadian Press
Tuesday, January 21, 2003
OTTAWA (CP) - As expected, the Bank of Canada left its key overnight interest rate unchanged at 2.75 per cent in its scheduled rate setting announcement Tuesday but warned rates could rise this spring.
The bank rate remained at three per cent. The central bank said in its news release that uncertainties and instability in the global economy persuaded it to hold off on rate increases immediately. They will come, however.
"With the stance of monetary policy currently very stimulative, a reduction of stimulus will be required in order to return inflation to the two-per-cent target over the medium term," the bank said.
Some economists read this to mean that higher rates are in the offing for spring.
"Our feeling is that the Bank of Canada will move towards hiking rates starting in April, setting in process a series of moves over the rest of the year that will raise the benchmark rate to 4.5 per cent by year-end," said Derek Holt, assistant chief economist for Royal Bank.
"In the meantime, the Bank of Canada is biding time amidst ongoing uncertainty in the U.S. economy and geopolitical tensions."
Marc Levesque, senior economists for TD Bank, agreed:
"The message from this morning's statement is about as clear as it can get - the Bank of Canada is gearing up to pull the interest rate trigger sooner rather than later.
"The odds of a rate hike before June have increased dramatically, and the likelihood that the bank will wait until then is contingent on the Canadian economy slowing over the next couple of quarters, as we expect it to."
Avery Shenfeld of CIBC World Markets took the opposite tack, saying rate increases aren't imminent.
"The bank's patience will be rewarded if, as we expect, the economy avoids overheating without a dose of higher interest rates this year," he said.
His prediction: "We look for the overnight rate to stay at 2.75 per cent through 2003, with the first rate hike not in store until this time next year."
The bank said it is watching inflation closely, after higher-than-expected rises in recent months.
Inflation hit 4.3 per cent in November and the core rate, which eliminates the most volatile commodities in the index and is most watched by the bank, was at 3.1 per cent.
That was above the bank's inflation range target of between two and three per cent. Some suggested that much of the inflation was another echo of the post-Sept. 11 slump a year earlier, but the bank was cautious.
"It is the bank's view that the economy may be operating closer to its production capacity than previously believed," it said.
Levesque took the bank's remarks as a clear signal.
"The bank took a noticeably more hawkish stance in its press release - especially when compared to the statement that accompanied its decision in early December - and enough so as to leave little doubt that it is preparing financial markets for an eventual interest-rate hike."
Shenfeld predicted a strengthening of the Canadian dollar this year, which in itself will act as an economic brake without a rise in interest rates.
The next scheduled rate-setting is March 4.
On Thursday, the bank will issue its views on the economy and inflation in a monetary policy update.
Canadian Press
Tuesday, January 21, 2003
OTTAWA (CP) - As expected, the Bank of Canada left its key overnight interest rate unchanged at 2.75 per cent in its scheduled rate setting announcement Tuesday but warned rates could rise this spring.
The bank rate remained at three per cent. The central bank said in its news release that uncertainties and instability in the global economy persuaded it to hold off on rate increases immediately. They will come, however.
"With the stance of monetary policy currently very stimulative, a reduction of stimulus will be required in order to return inflation to the two-per-cent target over the medium term," the bank said.
Some economists read this to mean that higher rates are in the offing for spring.
"Our feeling is that the Bank of Canada will move towards hiking rates starting in April, setting in process a series of moves over the rest of the year that will raise the benchmark rate to 4.5 per cent by year-end," said Derek Holt, assistant chief economist for Royal Bank.
"In the meantime, the Bank of Canada is biding time amidst ongoing uncertainty in the U.S. economy and geopolitical tensions."
Marc Levesque, senior economists for TD Bank, agreed:
"The message from this morning's statement is about as clear as it can get - the Bank of Canada is gearing up to pull the interest rate trigger sooner rather than later.
"The odds of a rate hike before June have increased dramatically, and the likelihood that the bank will wait until then is contingent on the Canadian economy slowing over the next couple of quarters, as we expect it to."
Avery Shenfeld of CIBC World Markets took the opposite tack, saying rate increases aren't imminent.
"The bank's patience will be rewarded if, as we expect, the economy avoids overheating without a dose of higher interest rates this year," he said.
His prediction: "We look for the overnight rate to stay at 2.75 per cent through 2003, with the first rate hike not in store until this time next year."
The bank said it is watching inflation closely, after higher-than-expected rises in recent months.
Inflation hit 4.3 per cent in November and the core rate, which eliminates the most volatile commodities in the index and is most watched by the bank, was at 3.1 per cent.
That was above the bank's inflation range target of between two and three per cent. Some suggested that much of the inflation was another echo of the post-Sept. 11 slump a year earlier, but the bank was cautious.
"It is the bank's view that the economy may be operating closer to its production capacity than previously believed," it said.
Levesque took the bank's remarks as a clear signal.
"The bank took a noticeably more hawkish stance in its press release - especially when compared to the statement that accompanied its decision in early December - and enough so as to leave little doubt that it is preparing financial markets for an eventual interest-rate hike."
Shenfeld predicted a strengthening of the Canadian dollar this year, which in itself will act as an economic brake without a rise in interest rates.
The next scheduled rate-setting is March 4.
On Thursday, the bank will issue its views on the economy and inflation in a monetary policy update.
