Is The Bank of Canada Done Hiking Interest Rates?

The market half expected the Bank of Canada to hike interest rates on Thursday, but it was still a surprise to many given the concerns that remain about the strength of the economy. The central bank raised the benchmark interest rate from 0.75% to 1%, marking the third quarter point increase since the hikes began in June. Banks were quick to follow suit and raise their prime rates by 25 basis points to 3%.

Interest rates have been at abnormally low levels as a result of the financial crisis and the resulting global recession and now with countries out of recession, many central banks, including Canada's, have began to slowly correct these levels. There is a lot of concern among central banks that if interest rates are kept too low for too long another bubble could occur, such as the housing bubble that sparked the U.S. subprime crisis.

Canada's housing market does not appear to be in trouble of bubbling anytime soon, and the central bank has admitted that economic growth will likely be slightly softer than it had expected this year. With three and a half months left of 2010, will the central bank hike again, or will Canadians be spared another rate rise for now?


Economists are divided in their expectations, according to comments in this Financial Post blog. However, most seem to think that the Bank of Canada will keep rate on hold at 1% for the remainder of this year while they assess the impact of their decision. If the economy continues to gradually strengthen, another rate rise will likely come a few months into 2011.

"In our opinion, the odds favour the Bank of Canada pausing for some time. And, TD Economics does not anticipate another tightening before March of next year," Craig Alexander, the chief economist at TD Bank Financial, said in a note to investors. However, he says the central bank gave no clue to its next decision in the statement that it released on Thursday. If anything, he says the Bank of Canada seems to anticipate softer economic conditions ahead, such as a possible rise in the unemployment rate, which was at 8% in July, according to Statistics Canada.

"In the absence of clarity surrounding the outlook, there is no commitment or hint to either a pause in the tightening cycle or the continued gradual nudging of interest rate higher. Key economic and financial indicators over the next six weeks will ultimately decide the next [Bank of Canada] decision on October 20," Mr. Alexander said.



For related blogs, see also:
Half of Canadians Feel Worse Economically Then During The Recession
Gold Expected To Hit US$1,500 by December
Hedge Fund Sends Cocoa Prices Soaring. Should You Invest?