On the heels of a speech last night by Pierre Duguay, deputy governor of the Bank of Canada, RBC Financial economists note that the BoC appears to be taking a more hawkish position on interest rates.

Duguay was speaking to the School of Business, Okanagan College, in Kelowna, BC. In his comments, he reiterated the bank’s view that “some modest further increase in the policy interest rate may be required”.

RBC notes that he also highlighted that the global economy may proved to be stronger than they had assumed in their previous forecast. “We are now well into the preparation of our spring Monetary Policy Report, which will be released on April 27. If anything, the global economy may be a touch stronger in 2006 because of improved growth prospects for Japan and Europe,” Duguay said. “In our upcoming report, we will provide a full analysis of economic developments, trends, and risks to the outlook.”

RBC says it expects the Bank to maintain its optimistic outlook for Canadian growth in 2006 and will most likely boost its forecast for 2006 world growth. “In this environment, the Bank is likely to continue to push monetary policy toward a more neutral stance, which we estimate will result in the overnight rate rising to 4.5%, or 75 basis points higher than today’s 3.75% rate,” it said, noting that the market is pricing in two more rate increases this year which would see the overnight rate rise to 4.25%.

“The risks to monetary policy are slowly shifting from neutral to one of a more aggressive Bank of Canada given its well advertised view that 2006 will be a solid year for world demand and, hence, Canadian exports,” RBC concluded. “With the Canadian economy already into excess demand and another year of clear above-trend growth likely in the cards, a tighter monetary stance may be needed.”