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Countdown to Rate Hikes

The Bank of Canada took its first steps Tuesday toward returning the country to more normal interest-rate levels by signalling a more hawkish tone on inflation and acknowledging the economy is performing better than expected on “vigorous” consumer demand.

The messages were conveyed in the Bank of Canada’s latest interest-rate statement, which kept its record-low benchmark rate of 0.25 per cent and pledged to keep it there at least until July.

But most bank watchers took note of subtle changes in the statement, compared with previous rate announcements, and there was enough there for them to begin the countdown to rate hikes.

“I suspect (Bank of Canada governor) Mark Carney and company are starting to feel the urge to tighten — not a strong urge now, but an urge nevertheless,” said Michael Gregory, senior economist at BMO Capital Markets.

Among the key changes was a declaration from the bank that the risks to its inflation outlook are “roughly balanced,” and no longer “tilted slightly to the downside” — language that suggests deflation is no longer a concern and that price increases are creeping up to a level that may prompt a response.

The wording change from the Bank of Canada may appear trivial, “but it is nonetheless significant as it reflects an economic backdrop that continues to improve at a much faster pace than what the bank had envisaged,” said Paul-Andre Pinsonnault, senior fixed-income economist at National Bank Financial.

In the statement, the central bank acknowledged economic activity has been “slightly higher” than its own projections, with the five-per-cent gain in the fourth quarter powered by “vigorous domestic demand” and a recovery in exports.

The consensus remains that the central bank will wait until July to begin raising rates. There are two more scheduled rate decisions between now and then — April 20 and June 1.

“What we saw (Tuesday was) one of many steps aiming at moving away from dovish statements to relatively more hawkish ones,” said Sebastien Lavoie, economist with Laurentian Bank Securities.

His firm predicts rate increases will begin in the third quarter, but he said the odds have increased that the first hike will be in July as opposed to September.

Economists are predicting increases of one full percentage point to 1.5 points over the second half of 2010.

Source: Paul Vieira, Canwest News Service

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