The Bank of Canada, in its October Monetary Policy Report released Wednesday, said that it would increase interest rates to control inflation rate, despite forecasts for economic growth to slow later this year and in 2003.

In a news release, the central bank said that the Canadian economy is now operating fairly close to its full production capacity.

The bank added that it will “continue to remove monetary stimulus before the excess supply in the economy is completely absorbed.”

The bank said Inflation remains a concern as “consumer price inflation has risen above the 2% target and is expected to rise further before year-end because of high oil prices.”

The central bank said that over the next nine months Canada’s economic growth is expected to average slightly less than the economy’s 3% growth potential. The latest bank forecast now calls for growth of about 3.5% in 2002 and in a range of 2.75% to 3.75% in 2003.

On Wednesday, Statistics Canada reported that the country’s annual inflation rate for September stood at 2.3 %.

After scrutinizing the central bank’s statement, economists agree that interest rate hikes are coming, but how much, how soon, remains a point of dispute.

“It seems that with each passing public comment from the Bank of Canada, officials are gradually turning down the volume on the need for higher interest rates,” offers BMO Nesbitt Burns. It notes that while the Bank flatly states that “we will need to continue to remove monetary stimulus”, it also allows that the “pace and extent of this action” remains highly uncertain.

TD Bank sees a more hawkish tone in the report. It allows that equity market weakness, a struggling U.S. economy, and the likelihood of a conflict with Iraq may have kept rates unchanged recently. “But if there is one conclusion that rings loud and clear from this morning’s installment of its semi-annual Monetary Policy Report, it is that the Bank will be back in tightening mode, and promptly so, the instant these factors convincingly start to dissipate. In fact, upon reading this morning’s missive, one is left with the distinct impression that the Bank of Canada is walking a tightrope – and a thin one at that.”

Bank of Montreal’s economists say that the report confirmed that, though interest rates are slated to rise in the year ahead, they will likely do so in a gradual fashion.

But TD reads more inflation worry into the report. It notes that the report acknowledges that the Canadian economy is currently operating very close to full capacity, and that core inflation is poised to break through the top end of its target band. “It is visibly worried that the upward push may start to spill over to other prices and costs.”

“In sum, this morning’s MPR leaves the distinct impression that the Bank is keenly aware that it has very little wiggle room on the monetary policy front,” says TD. “As a result, while our base case is for the Bank of Canada to remain on hold until March, there is a significant risk that it will pull the trigger earlier, with the outcome depending squarely on the strength of the U.S. recovery, the sustainability of the nascent rally in equity markets, and international political developments.”

BMO says that it expects the Bank to stand pat in December. “However, a stronger US economy and renewed stability in equities should encourage the Bank to resume tightening in January. We expect overnight rates to rise steadily through 2003 from the current 2.75% to a more neutral level of 5.0%.”

BMO Nesbitt says, “The Bank of Canada still sees the economy as operating very close to full potential, but there has been a subtle shift in tone – there simply is less urgency to tighten policy, with growth expected to cool to around 3%, or lower, in the next three quarters. The mantra remains that rates hikes are coming, in a “timely and measured” manner, but it sounds increasingly like those rate hikes will be pushed further back into 2003.”