Today’s decision by the Bank of Canada to hold the line on interest rates surprised no one, but the central bank’s hawkish policy statement has some economists predicting rate hikes soon.

“The Bank of Canada chose to err on the side of uncertainty despite inflationary pressures and kept rates steady this morning. Our feeling is that the Bank of Canada will move towards hiking rates starting in April, setting in process a series of moves over the rest of the year that will raise the benchmark rate to 4.5% by year-end, predict RBC Financial Group economists. “In the meantime, the Bank of Canada is biding time amidst ongoing uncertainty in the U.S. economy and geopolitical tensions.”

Bank of Montreal agrees, saying, “Despite the more hawkish tone, we believe the Bank will wait until the April 15 policy announcement date before resuming a tightening course given the mixed U.S. data and the ongoing geopolitical concerns. However, should the U.S. data come in stronger than expected, or should the potential conflict in Iraq be resolved soon, the Bank could move as early as the March 4 announcement date. Based on our outlook for strong economic growth in both Canada and the U.S. this year, we expect overnight rates to rise to 4.25% by year’s end and to a more neutral 5% by the spring of next year.”

CIBC World Markets says, “The Bank of Canada has remained patient, but is beginning to worry that it might be doing the wrong thing by putting off interest rate hikes once again today. In fact, the Bank’s patience will be rewarded if, as we expect, the economy avoids overheating without a dose of higher interest rates this year.” It reads the tone of today’s statement as those of a Bank that believes it will be raising rates sooner rather than later.

TD Bank calls the Bank’s nervously hawkish tone, “a shocker”. “The message from this morning’s statement is about as clear as it can get — the Bank of Canada is gearing up to pull the interest rate trigger sooner rather than later. The odds of a rate hike before June have increased dramatically, and the likelihood that the Bank will wait until then is contingent on the Canadian economy slowing over the next couple of quarters, as we expect it to.”

“In our view, the Canadian economy is still facing enough ‘headwinds’ –- to use the Bank’s own terminology — to keep the Bank in a cautious mode over the near term. The U.S. economy is still struggling to take flight, and if anything, it is on an even more fragile footing than it was six weeks ago – as illustrated by the most recent flurry of U.S. economic indicators,” comments TD.

CIBC reminds investors that, “it’s not the Bank’s forecast of what it will do that matters. It’s what it actually does. If growth remains near its current 3%, the Bank as always can and will change its mind about the need for rate hikes this year. That seems likely to be the case. The next time the Bank meets, in March, the same uncertainties it now cites as a reason for pause are likely to be with us — with neither the Iraq front, nor the US economic front, having been resolved. Later in the year, we should see a second-leg of Canadian dollar appreciation; even if the Bank of Canada keeps rates on hold, another round of Fed cuts will widen interest spreads in the loonie’s favour.”

CIBC still expects the overnight rate to stay at 2.75% through 2003, with the first rate hike not in store until this time next year.