18 October 2005

Bank of Canada Rate Announcement

The following note is from the Senior Economist at the Canadian Chamber of Commerce.

As widely expected, the Bank of Canada hiked its key overnight target rate by 25 basis points to 3.0% at this morning's Fixed Announcement Date. This was the second rate rise of the year after September's initial increase.

Most significant from today's announcement was the statement from Canada's central bank that stated that Canada's overall economy now appears to be operating at its full production capacity. The Bank projects that the Canadian economy will continue to operate at about its production potential through 2007. This basically means real GDP growth around 3%. CPI and core inflation are projected to be 2% in the second half of 2006, although overall inflation as measured by CPI basked of goods is expected to average near 3% until then.

In another key statement, the Bank re-iterated this morning that further reduction of monetary stimulus (i.e. further interest rate hikes) will be required to maintain a balance between aggregate supply and demand over the next four to six quarters, and to keep inflation on target.

The next scheduled date for announcing the overnight rate target is December 6, 2005. Until then, the Bank will continue to monitor international developments particularly closely and will continue to assess the adjustments and underlying trends in the Canadian economy, including developments on the inflation profit.

To summarize, given today's statements by the Bank of Canada, I expect interest rates to continue to rise over the remainder of 2005 and into the first half of 2006. Heading into the decision, the Canadian dollar was trading at 84.39 U.S. cents. It is now up slightly to 84.55 U.S. cents.