Following this morning’s action by the Bank of Canada to boost interest rates, economists are busy determining the central bank’s next move.

RBC Financial economists say that the move starts, “what is likely to be a string of increases over the rest of 2002 and into 2003 designed towards removing excess liquidity from North American markets”.

“This is a cautious move,” RBC says. “Though not the first in the industrialized world to start tightening, it is likely to be a rather common theme across many countries as the temporary window of opportunity on very low short-term borrowing costs starts to close. The focus for Canada now shifts to the next meeting on June 4 when a further hike of a quarter point is expected.”

CIBC World Markets says that the Bank “couldn’t justify holding rates at four decade lows in the face of a huge quarter for employment gains”. It stresses that rate decisions are taken one at a time, so the Bank has not committed itself to a full tightening round. “But barring a surprising and unlikely reversal of economic fortune, today’s rate hike will be the first of four this year that will take the overnight rate up to 3% by year-end.”

“The rate hike is in itself a mild negative for interest sensitive equities, but represents the Bank’s vote of confidence in Canadian economic growth,” CIBC says.

Bank of Montreal economists say, “The unprecedented amount of monetary stimulus in the economy suggests the Bank will continue to raise rates going forward to “rebalance” monetary conditions. However, ongoing uncertainties about the pace of the recovery suggest it will do so gradually rather than aggressively, at least in the near term.”

It says, a gradual unwinding of the monetary stimulus is “consistent with our view that the Bank will move in increments of 25 basis points at each of the next five fixed announcement dates this year, including the next scheduled date June 4. We expect the target for the overnight rate to rise to 3.50% by year’s end, before peaking at a “neutral” 5.00% by the middle of next year.”

Although BMO allows that there are risks to this outlook on both the upside and downside. “Should the recovery in either Canada or the U.S. show signs of stumbling, the Bank will likely stand pat at some of the upcoming fixed announcement dates. In contrast, should the expansion proceed faster than anticipated, the pace of tightening could be cranked up to increments of 50 basis points.”