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
