Following this morning’s decision by the Bank of Canada to leave interest rates unchanged at 2.75%, economists have begun to speculate when the central bank will begin hiking rates again.

The Bank cited weaker-than-expected growth in the second half of 2002 amid “continuing financial and geopolitical uncertainties and global economic weakness” as motivation for the stand-pat decision, observes Bank of Montreal. RBC Financial notes that, “the Bank also reminded markets of its intention to take back monetary stimulus over the medium-term – a note of caution that has been consistently echoed in previous announcements.”

BMO Nesbitt Burns says, “The Bank of Canada continues to gradually tone down its hawkish rhetoric, although officials have not fully slammed the door shut on further rate hikes early next year.”

RBC indicates that the Bank is firmly committed to eventually raising rates in this country. “Moreover, it seems to be more inclined to do so than the Fed, largely owing to the better economic fundamentals this side of the border. These solid economic fundamentals in Canada as well as the better tone of recent data coming from the U.S. which, if extended into early next year, will in our view likely put the Bank of Canada back on the path of hiking rates by April of next year.”

“We believe economic growth will be soft enough in the fourth quarter (2%), and the external environment tepid enough, to keep the Bank on hold at the January 21 scheduled announcement date,” says Nesbitt. “However, as global economic conditions improve, the Bank is expected to resume tightening at the March 4 announcement date.”

Nesbitt allows that its’ outlook for the economy is more optimistic than the central bank’s. “In the last Monetary Policy Report, the Bank said it expected growth to come in slightly below potential (of 3%) through the fourth quarter of 2002 and the first half of 2003. In contrast, we anticipate growth of 3<=% over this period. The expected above-potential pace of growth should absorb the remaining slack in the economy and encourage the Bank to unwind the stimulus in a "measured" yet steady manner. Overnight rates are projected to peak at a more "neutral" level of 5% by the spring of 2004."

Nesbitt also believes that the Bank will remain on hold at its next rate decision meeting on January 21. “Things will be more interesting for the March 4 decision date, however, as it should be clearer by that point that the U.S. economy has turned the corner, helping pull the global economy along for the ride. The Bank remains biased to tighten, but they are sounding increasingly comfortable waiting on the sidelines,” it concludes.