Global Insight says that the Bank of Canada’s decision to raise the overnight rate 25 basis points to 4% on April 25 moved the policy interest rate back into a neutral range of 4%-5%. It expects at least one more quarter point hike this year, but warns there could be more.

In a research note, the firm says the Monetary Policy Report released today provides important clues about future interest rate developments. “Based on our outlook, Global Insight assumes that the bank will raise the overnight rate one more time by a quarter percentage point, to 4.25%, before going for an extended break,” it says. “The more-optimistic outlook for the Canadian economy by the Bank of Canada, however, raises the odds of one or two more rate hikes later this year.”

The firm says that monetary policy tightening beyond the 4.25% level will depend on incoming data. “In particular, the bank is expected to wait until the second half of the year to assess the impact of the cumulative rate hikes since September 2005, and then take stock of the momentum in the global economy, commodity prices, and the Canadian dollar,” it says.

“The Bank of Canada’s outlook for the Canadian economy is more robust than the consensus. This implies that market participants will adjust upward their expectations for Canadian interest rates and, therefore, the Canadian dollar,” it adds.