Economists had expected that the Bank of Canada would raise short-term interest rates by 25 basis points today, but the tone of the accompanying statement was more dovish than some expected.

Bank of Montreal notes that the statement from the central bank said the economy is “evolving largely in line with the Bank’s expectations” and that, though growth was somewhat stronger-than-expected in the third quarter, the Bank still sees the economy operating at the same level of utilization by the end of the year as was projected in the October Monetary Policy Report. The statement also said that the risks to the outlook “are balanced in the short term, but are tilted to the downside through 2007 and beyond,” it notes.

Continued rate tightening was indicated by the comment, “some further reduction in monetary stimulus will be required to maintain a balance between aggregate supply and demand over the next four to six quarters and keep inflation on target,” BMO adds.

“The Bank’s comments support our view that the overnight rate target will continue to climb steadily and gradually in the months ahead. We see quarter-point rate hikes at each of the next three successive fixed announcement dates to April. Two additional moves later in 2006 will bring rates up to a more neutral level of 4.50% by October,” it concludes.

However, RBC says, “The accompanying statement continues to call for a further reduction in monetary stimulus, but will likely be interpreted as a little more dovish about inflation expectations than some may have expected.”

“The statement noted that the outlook for the economy and inflation through 2006 and 2007 is broadly unchanged from its last statement in October. The next statement is due out on January 24 next year, at which point we expect a further quarter-point rise in short-term borrowing costs,” it says.

TD bank points out that the today’s statement was “conveniently” silent on the red-hot Canadian labour market, where the unemployment rate has fallen to a thirty-year low and year-on-year wage growth accelerated to 3.8% in November.

“Still, while today’s press release may have failed to reach the hawkish heights expected by some, we continue to believe that more rate hikes are in store,” TD concludes. “Indeed, the Bank said as much, reiterating that ‘some further reduction in monetary stimulus will be required to maintain a balance between aggregate supply and demand over the next four to six quarters to keep inflation on target’.”

“Our reading of today’s missive is that the Bank intends to keep tightening its monetary settings in line with abundant evidence that there is virtually no slack in Canada’s product and labour markets. However, it is keeping its options open in case the risks it has identified to the longer-term outlook – which it characterizes as being “tilted to the downside” – materialize,” TD says. “The bottom line? We still see three more 25-basis point moves in the coming months, with the overnight rate peaking at 4% in mid-2006.”

BMO Nesbitt Burns concludes, “The language of the press release suggests that there are more rate hikes to come, although there was also absolutely no hint that the Bank plans to accelerate the pace of tightening.”

“The tone of the press release may have been a little less hawkish than the market expected,” it agrees. “The Bank continues to fret over the medium-term outlook, likes the drop in headline CPI, and does not seem overly concerned about the recent spate of strong growth reports. The next decision date is on January 24th, and another 25 bps hike looks likely at that point. Indeed, we expect the Bank to keep hiking in each of the next three meetings, lifting the overnight rate to 4.0%.”