The Bank of Canada today delivered yet another 25 basis point rate hike, as expected, raising the overnight rate to 3.75%. Yet it surprised analysts by mentioning the impact of the dollar, and changing its language to suggest that future hikes aren’t a slam dunk.

RBC says that the statement had a less hawkish tone and should be positive for bonds but negative for the currency. It notes that in its statement accompanying the rate announcement, the Bank indicated that the currency has appreciated to a level that is higher than they expected in their economic forecast.

“The mention of the currency in today’s report and a change in wording… raise uncertainty about how much farther interest rates will rise,” RBC adds. “The statement signals that the Bank is closely analyzing the reasons for the currency’s strength and suggests that policy makers are less comfortable with the currency trading outside the expected US85¢ to US87¢ range.”

Bank of Montreal suggests that future rate moves will be a function of the near-term pace of economic growth and indications of how well the Canadian economy is contending with the high value of the loonie. “Given our expectation of growth bouncing up to 3.6% in the first quarter and achieving a relatively robust 3.8% increase for all of this year, on a fourth quarter-over-fourth quarter basis, we continue to expect further modest rate increases,” it says. “The overnight rate is expected to be boosted 25 basis points at the next fixed announcement date April 25. The pace of tightening is expected to slow subsequently though the rate will rise to an eventual peak of 4.50% by October of this year before the Bank of Canada moves onto the sidelines.

National Bank Financial says that the Bank of Canada appears to be maintaining a slight tightening bias, but recent currency movement “appears to have shaken its conviction about the need for further rate hikes.”

“Although incoming economic data will obviously remain key driver of Bank future actions, we are sticking with our view that this morning’s move should be followed by a prolonged pause,” NBF adds. “In our opinion, the higher trading range for the Canadian dollar will continue to take its toll on the manufacturing base and keep inflation below Bank of Canada projections. In this environment, we believe that the Bank of Canada should move from ‘preemptive tightening’ to a ‘preemptive pause’.”

“With the Canadian economy weathering a major foreign exchange shock and amid signs that the U.S. economy could lose some momentum, the Bank’s decision to become less committed to rate hikes is prudent,” TD Bank concludes. “All of this is consistent with our long standing view that the peak in the current tightening cycle is an overnight rate of 4.00%, but there is no guarantee that the final hike will come in April.”

RBC forecasts that the economy will continue to grow at an above-potential rate in 2006 and that the core inflation rate will rise above 2% by mid-year. “This view, alongside a weaker Canadian dollar, is consistent with a policy rate that is closer to its neutral setting, which we estimate is 4.5%. However, should the economy be weaker than we expect, today’s statement leaves the door open to the policy rate peaking lower than our 4.5% forecast,” RBC says.