The Bank of Canada hiked rates a modest 25 bps to 2.75% this morning. The trick for economists is to divine where the Bank will go from here. Most foresee rates going higher, but that prediction is not unanimous.

The central bank justified its hike in the prepared statement which accompanied the announcement. It noted that growth in Canada has remained stronger than expected, and has broadened out since the last rate hike on June 4. Furthermore, the economy has been moving towards full production capacity more quickly than anticipated.

RBC says that the Bank’s message suggests caution and that more rate hikes will follow this year. BMO Nesbitt Burns agrees. “The Bank is trying to walk a fine line,” says Nesbitt. “The key change in the statement relates to the near-term outlook. Previously, the Bank had focused on the strong momentum and the substantial amount of monetary stimulus. This time the Bank was more cautious. One gets the sense that the Bank will raise rates further, unless there is a significant negative feedback onto the economy from the financial volatility.”

Over at TD Bank, economists say economic recovery in both Canada and the U.S. will remain “firmly afoot. The Bank will follow up today’s move with quarter-point increases in September and October, and then – as the recent gloom in U.S. stock markets likely
fades by year-end – by 50 basis points in December. That would still leave overnight rates at relatively stimulative settings – about 100 basis points below any level that could reasonably considered as neutral.” TD economists predict the Bank is likely to boost rates by a total of 125 basis points over the course of next year.

However, the contrarian viewpoint comes from CIBC World Markets. Economists there are of the view that “the Bank will take a pause in its tightening cycle and keep interest rate policy stable through to the end of the year. The most recent easing cycle lasted a full year from January 2001 to January 2002, resulting in cuts of 375 bps. We expect theBank to take back some, but not all, of those rate cuts in this current tightening cycle (our CIBC forecast is calling for 50 bps more through the end of 2003). The previous tightening cycle lasted from November 1999 to May 2000, with the Bank raising rates by a cumulative 175 bps.”