The Bank of Canada followed through and raised rates, while opening the door to a pause in future rate hikes in the wake of higher energy prices. Both stances were expected, although some economists found today’s statement more hawkish than expected. And, they are divided on whether they’ll hike at the next scheduled rate setting meeting or not.

National Bank Financial notes that the Bank recognizes that the impact of Katrina will disrupt economic activity in the U.S. “At this point, however, the Bank’s preliminary assessment is that the negative impact will be temporary in the U.S. and that for Canada it is likely to be modest,” it reports.

“Although the (Bank) appears to be inclined on pursuing its tightening campaign at a measured pace, this morning’s press release introduces somewhat greater uncertainty with regards to the timing of future moves,” NBF says. “Indeed, should the fallout of Katrina turn out to be worse than what is currently expected (and perhaps forcing the Fed to the sidelines), the Bank has room to manoeuvre to reassess its outlook and take a pause if needed.”

NBF suggests motor vehicle exports from Ontario could prove a good indicator of whether or not U.S. consumer confidence is more significantly affected than what is currently assumed by the spike in gasoline prices.

Bank of Montreal points out that instead of noting that it will need to remove the stimulus “in
the near term,” as mentioned in both the July 12 press statement and the Monetary Policy Report Update, “the Bank said in a less committed fashion that it ’will be monitoring developments closely and continuing to assess underlying trends in the economy and their implications for keeping inflation on target over the medium term’.” It says that this keeps its policy options flexible at a time of increased uncertainty about the economic outlook.

BMO says it continues to expect the Bank to raise rates just one more time this year, by 25 basis points, with the move more likely to come at the December 6 fixed announcement date rather than the October 18 date. “Postponing a rate cut to December would give the Bank a little more time to assess the economy’s outlook, made all the more difficult by the uncertain impact of Hurricane Katrina on the US economy and energy prices,” it says. “Looking further out, we see overnight rates climbing gradually to a more neutral level of 4.50% by early 2007.”

BMO Nesbitt Burns reads the accompanying statement as “cautious about future moves, as officials clearly want to keep their options open, given the uncertainty and energy price shock in the aftermath of Hurricane Katrina. However, the bias to tighten remains firmly in place.” It says it continues to look for another rate hike next month, depending on the data.

TD Bank suggests the Bank appeared to be somewhat more hawkish than some were expecting. “Given that it continues to view the stance of monetary policy to be stimulative, the Bank will surely want to continue pushing rates higher,” it observes. That said, TD adds, “We think the Bank has left the door open for a pause in October, but a rate hike would follow in December. That would take the overnight rate to 3% by year’s end. However, we must stress that this path is by no means set in stone as any positive string of Canadian data between now and October 18th could easily result in the Bank pulling the trigger again next month.”

Finally, NBF says it is worth noting that the Bank makes no mention of the Canadian dollar in its press release even though it is now trading higher than the US83¢ level that last year had led to an interruption of the tightening campaign. “It now appears that the Bank is willing to tolerate a higher (Canadian dollar) than what was assumed last year,” NBF says. “This absence of reference on the (loonie) in the context of high energy prices and uncertainty about future Fed actions should provide support for the (loonie) in the coming weeks.”