The Bank of Canada remains poised to hike interest rates next week for the third time in a three-month span, despite the deepening turmoil in equity markets. Observers expect interest rates to climb by 25 basis points.

While the U.S. Federal Reserve still appears to be standing pat on interest , BMO Nesbitt Burns says that the Bank’s solo move looks set to continue through the fall. The Bank is right to be acting independently, BMO says, because Canadian inflation looks to be uniquely robust. “Even with very modest monthly gains through the rest of 2002, the Bank’s measure of core inflation will approach the 3% upper boundary by year-end. The projected second-half increase will take Canadian core CPI above U.S. trends for the first time since the early 1990s.”

“There is little mystery behind the diverging paths,” says BMO. “In the first half of the year, the Canadian economy resembled a raging inferno while U.S. growth resembled a campfire.” BMO says that some market watchers have argued that in a relatively small, open economy, North American spare capacity drives inflation, not just local capacity. But BMO says, “There is plenty of reason to believe that at least some domestic inflation is ‘made in Canada.’ “

“The main message is that as long as the North American growth gap persists, the Bank of Canada appears determined to continue carving out an independent monetary policy.”

CIBC World Markets, however, suggests that the rate hikes may soon may come to an end.

Continued pressure on the stock market, and dogged weakness in the U.S., has CIBC now wondering how far the Bank can go by itself. “With a stunning 300,000 jobs in the books and growth a scintillating 5% through the first half of the year, it’s hard to take issue with another quarter-point hike,” says CIBC. But, it continues, “More than next week’s sure thing, it’s where the Bank steers policy in the coming months that poses the larger potential risk.”

CIBC acknowledges that most dealers see Canada’s overnight target at 3.5% by year-end, which would mean 25 bps hikes at each of the Bank’s remaining three meetings. “But just how realistic and safe is this policy road map?” it asks.

“Downside economic risks are still too great, and signposts of economic slack all too apparent, to warrant an aggressive anti-inflation stance by the Bank,” CIBC argues. So pay careful attention to Governor Dodge on Tuesday, it could very well be the last you hear from him this year.”