Economists say that the Bank of Canada’s decision to raise the overnight rate by 25 basis points to 4.25%, and the changing language in the accompanying policy statement, suggest that the BoC is done hiking rates.

Bank of Montreal says that the central bank, “sent a clear message that no further rate increases are in the cards, thereby likely ending a tightening cycle that has seen rates climb 175 basis points in the past year.”

This reading of the BoC’s move is echoed by a number of economists. “The Bank suggests in its press release that it is now done hiking rates given that core and headline CPI inflation are evolving in line with the Bank’s expectations,” agrees RBC Economics. “The Bank probably views the possible non-fundamental increase in the Canadian dollar relative to the U.S. dollar as temporary due to heightened volatility in foreign exchange and commodity markets.”

RBC points out that key statements from past press releases, such as “some modest further increases in the policy interest rate may be required to keep aggregate supply and demand in balance and inflation on target over the medium-term” have been removed, and the statement “The Bank judges the risks to its projection are roughly balanced, with a small tilt to the downside later in the projection period” is implicitly unchanged from that presented in the April Monetary Policy Report. “The Bank continues to remain on close data watch to determine if any changes in policy will be required,” it concludes.

National Bank Financial maintains that this latest hike was unnecessary. “Inflation is still tame in Canada owing to persistent downward pressure from prices of imported consumer goods. This tendency was certainly not put at risk by the strength of the Canadian dollar, quite to the contrary. Still the Bank felt it would be more comfortable with a little more insurance policy given the momentum of the Canadian economy,” NBF says.

BMO Nesbitt Burns however, suggests that there are clues that the BoC “still retains a very slight bias to tighten”. It points out that twice in the press release they play up Canada’s economic vigor, that it appears to downplay to surprise deceleration in the core CPI reported last week, and that it doesn’t explicitly mention the stronger loonie.

“The Bank of Canada appears to have ‘officially’ paused but still probably retains a bias to tighten,” BMO Nesbitt suggests. “The data, inevitably, will determine the length of pause and the post-pause policy direction. However, the bar for another rate hike has been set quite high.”

“Although the BoC did not make specific reference to loonie appreciation, it did nonetheless acknowledge the increased volatility in financial markets (including commodities and foreign exchange) of the recent weeks,” points out NBF. “It also dropped its reference to the economy operating at above its production capacity. In our opinion, this change in wording may reflect the recent upward revisions to the productivity data (released after the publication of the April MPR).” It expects the Bank to remain on the sidelines in the coming months.

TD Economics suggests that, “we have likely seen the peak in rates”, although it allows that the communiqué “did leave the door open to the possibility of further rate hikes in the future, noting that the Bank will monitor developments closely”.

“However, in our opinion, there is a good chance that we have seen the last tightening in the current cycle,” it predicts. “There are clear signs that housing markets in the U.S. are cooling, which will erode the housing-wealth effects that have been a powerful catalyst to American consumer spending in recent years. Even if there is a soft-landing in housing, the pace of U.S. economic growth is likely to slow to a more modest pace, which will act as an external negative shock to the Canadian economy. Add on the continued adjustment to the strong Canadian dollar and the prospects for more moderate Canadian consumer spending in the months ahead, the stage appears set for a period of weaker economic growth in Canada in the late 2006 and early 2007.”

“So, while the Bank will remain vigilant against inflationary pressures in the near term, we believe that the monetary authority will be rewarded for its decision to move to the sidelines now,” TD says.

@page_break@“The Canadian dollar weakened modestly as the Bank’s press statement cemented expectations of no further tightening. However, because today’s rate increase was only partly discounted by markets, debt instruments weakened moderately, with the yield on 2-year Canada bonds rising 4 basis points to 4.12%,” BMO reports.