Bank of Montreal economists are giving the possibility of a Bank of Canada rate hike, this month, a 45% chance. BMO says that the Bank of Canada looks at 15 key indicators to determine the appropriate setting for monetary policy.

It says that 10 of those 15 factors are pointing to the need for higher rates, four are neutral, and only one – commodity prices – is pointing to a need for lower rates.

“Growing evidence of a solid economic recovery will likely prompt the Bank of Canada to unwind the excessive monetary stimulus in the economy in the months ahead. Overnight rates, currently at 2%, are expected to rise in June and continue climbing towards 5% by the middle of 2003,” says BMO. It puts the likelihood
of a hike on June 4th at 85%.

The situation is less clear in the U.S., says BMO, where there’s a 35% chance of a rate hike at its May 7 meeting.

BMO says that the Fed looks at 18 factors in setting its rates. Only four of those are pointing to higher rates. Three factors suggest lower rates, and the majority are neutral.

“Mounting evidence of an economic recovery will eventually spur the Fed to remove some of the unprecedented monetary stimulus,” BMO says. “However, uncertainty about the strength and durability of the recovery, along with tame inflation, should delay the tightening until the June 25/26 FOMC meeting. The initial move will likely be limited to 25 basis points, though rates are expected to continue trending up to 5.50% by the summer of 2003.”