Bank of Canada expected to hike interest rates in mid-2010

December 9, 2009

December 08, 2009

TORONTO — The Bank of Canada repeated its pledge Tuesday to keep interests rates at historic lows until the middle of next year to stimulate growth and a sense of stability in the midst of a slow economic recovery.

But, economists are calling for rate hikes as much as a full percentage point or more later next year, and say the bank’s commitment to keep its key rates at 0.25 per cent creates a false sense of security in borrowers who have taken on debts larger than they could normally afford.

The C.D. Howe Institute’s 12-member monetary policy council’s median target for the overnight rate was for one per cent in the second half of 2010.

The council said the central bank should give a strong signal that when the overnight rate moves up, it may be quick and large. They also suggested the bank rein in the housing market by raising the required down payment on government-insured mortgages.

C.D. Howe president and CEO William Robson says a rapid rise in interest rates expected late next year could prove devastating for homeowners who have not evaluated their ability to carry their mortgage at a higher interest rate.

The central bank announced Tuesday the global economy has been slightly more positive than it was at the time of the bank’s October pronouncement, but added “significant fragilities remain.”

The economy grew less than analysts expected in the third quarter and inflation has been slightly higher than the central bank expected.

Diana Petramala, an economist at TD Bank, said as long as those fragilities remain, the Bank of Canada will not be swayed to move quickly with interest rate hikes.

She said TD believes there is more risk associated with the combination of a mild U.S. recovery and strengthening Canadian dollar than the central bank has outlined.

Petramala said the bank’s projection for three per cent growth in 2010 is slightly more optimistic than TD’s forecast of 2.7 per cent growth, adding that she believes the Bank of Canada’s first rate hike will not come until the fourth quarter of next year.

Dawn Desjardins, assistant chief economist at RBC Economics, said still volatile markets and global market uncertainties suggest a significant change to the central bank’s policy is premature.

Given the still-fragile global economy, she said, Canada’s growth rate in 2010 will likely fall short of those recorded during the early stages of past recoveries.

Desjardins added that if the economy continues to build momentum by next summer, the bank will likely hike the rate by one percentage point for the second half of next year.

Michael Gregory, a senior economist at BMO Capital Markets, said there was a faintly more hawkish tone in the bank’s announcement.

“The combination of higher-than-projected global growth and domestic core inflation is a shade more hawkish no matter what prism you’re looking through,” he said.

“The bank is on hold until the end of June, but come next Canada Day the bank will be hoisting its hawkish colours amid all the Canadian flags.”

The Canadian Press

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