Markets appear to be girding for a series of small interest rate hikes in Canada.

The C.D. Howe Institute announced that its Monetary Policy Council recommended that the Bank of Canada raise its target for the key overnight interest rate to 3.00% when it makes its next announcement on October 18.

The group was unanimous in wanting a 25 basis point increase in the overnight rate at the October 18 setting.

“Canadian domestic demand is robust and may get further stimulus from lax fiscal policy,” it says. “With the U.S. economy also showing strong momentum and adverse impacts from the higher Canadian dollar on the trade balance at least temporarily muted, the group felt that Canadian output and employment will continue to grow at least as fast as Canada’s productive capacity.”

“Many members were also inclined to see recent regional and sectoral shifts in activity as constraining aggregate supply, and therefore adding to inflationary pressure,” the think tank reports. “The group also noted that headline inflation is above target and that surveys are showing an increase in inflation expectations.”

When asked for their views about the following interest rate setting in December, 10 of the 11 members in attendance voted for a further increase in the overnight-rate target to 3.25% at that time.

When asked why the Bank should not move more aggressively, some members cited the risk of a further appreciation in the Canada-U.S. dollar exchange rate. Another point in favour of a less aggressive stance was the fact that core inflation continues to register increases below 2%. Although there was no consensus on the significance of this latter point, and some concern in the group that the Bank of Canada may in fact be targeting core inflation rather than the total CPI, as specified in the inflation-control targets.

Also, in a report issued earlier today, Stewart Hall, fixed income dealer with HSBC Securities (Canada) Inc., noted that the Canadian market is already well priced for a rate hike next Tuesday, and a follow on rate hike after that. He noted that the futures market is suggesting that the Bank will follow the US Federal Reserve Board in lockstep with rate hikes at each of the next two meetings. The market is also, “well along in pricing for a third potential rate hike at the January rate meeting”, he noted.