There’s a small risk that the Bank of Canada could be moving too slowly to hike interst rates, but economic forecasters at Global Insight Inc. think the Bank is probably playing it right.

“The Canadian economy is operating at full capacity and growth appears to be at or above potential. The policy interest rate, however, remains low despite recent increases,” Wojciech Szadurski writes in a research note. “Ostensibly, the Bank of Canada is behind the curve on inflation.”

However, it argues that the Bank “is adroitly steering the economy along the path of full employment and contained inflation”. Global Insight anticipates that the central bank will continue to tighten credit conditions in baby steps at every policy announcement, before stopping at a 4% rate in April.

“The argument for easing up on the accelerator is very strong. Economic growth remains robust and wage inflation has been moving up, while high energy prices have raised inflationary expectations,” it says. Also, the jobless rate has been gradually falling. The surprisingly strong economic growth is partly related to developments in the resource sector, it notes.

Global Insight says that it doesn’t expect a more aggressive tightening because core inflation has been stuck between 1.5% and 2.0% for more than a year. “The pass-through from energy to core prices has been largely absent,” it notes. “In contrast, the past appreciation of the Canadian dollar has put downward pressure on import prices, with a small negative influence on consumer price inflation. Meanwhile, the competition in consumer goods production from China and India has robbed local manufacturers of their pricing power.”

It adds that the Bank of Canada has considerable room to maneuver in case the unemployment rate falls further and wage inflation heats up. It can easily speed up the pace of tightening to 50 basis points and take the overnight rate to 4.0% by January.

“Finally, the bank has expressed concern about negative implications for world demand from the expected unwinding of global imbalances, such as the high current-account deficit and low household and government savings in the United States,” it says. “While such concerns are not part of Global Insight’s baseline forecast, they justify the bank’s decision to tighten credit in small steps.”

“As such, we do not think the Bank of Canada is behind the curve on inflation, and financial markets share our view,” it concludes. “The risk of the bank having to accelerate the pace of tightening, however, is small but significant. In such a scenario, look for the loonie to regain upward momentum and for the Government of Canada 10-year bond to close the yield gap with 10-year U.S. Treasury bonds rather quickly.”