The Bank of Canada’s policy statement accompanying today’s decisio to raise the overnight rate to 4% signals more rate hikes, say Bay Street economists, although not all are certain.

RBC Economics says that the policy statement focused on upside risks to the forecast for global growth. The central bank also boosted its 2007 growth forecast for Canada from 2.9% to 3%, RBC reports. “On balance, the statement supports our view that the Bank will continue to raise the policy rate and is negative for bonds and positive for the currency,” RBC concludes.

The Bank of Canada indicated that the economy is “operating at or just above its production capacity”, RBC reports. The statement reiterated that “some further modest increase in the policy interest rate may be required to keep …inflation on target over the medium-term” and hinted that the forecast for global growth will be upgraded in Thursday’s Monetary Policy Report.

RBC also points out that the Bank now believes that “the risks to its projection are roughly balanced, with a small tilt to the downside later in the projection period” compared to characterizing the risks as “tilted to the downside through 2007 and beyond” in its January Monetary Policy Report Update.

BMO Nesbitt Burns says that the language of the accompanying press release was more hawkish than expected, keeping the door wide open for further rate increases if the data allow. “Overall, this is a slightly more hawkish message than expected from the Bank of Canada, as they have clearly left the door ajar for further rate hikes — with the economy operating at full capacity, or above, and headline inflation a bit above target,” Nesbitt says.

“We view 4% as the very low end for neutral, and expect at least one more rate hike this cycle, possibly at the next decision date (May 24), with the risks leaning to even more later on,” it says. “However, the Bank of Canada has made no commitments and the next rate decision will be ‘data dependent’, as the Fed would say. More complete details will be in the Bank of Canada’s Monetary Policy Report on Thursday, which may possibly send a more balanced message.”

TD Bank says that the statement is very ambiguous. “The Bank provided a remarkable ‘on the one hand’ and ‘on the other hand’ statement that argues both for further rate hikes and also a pause in the monetary policy tightening cycle,” it says.

“So, the outlook for interest rates is as clear as mud. And, financial markets will keenly await the April 27th Monetary Policy Report for further guidance about the Bank’s assessment of the economy and risks,” TD says. “Today’s communiqué suggests that the Bank may be still leaning towards hiking rates again at its next decision on May 24th, but it is also signaling that it will be extremely reactive to forthcoming economic data.”

“In our opinion, there are clear signs that the U.S. housing market is losing momentum, which is likely to lead to significantly slower U.S. economic growth ahead and we expect that upcoming Canadian economic reports will show a bit less strength. So, we will stick with the view that the Bank is done raising rates,” TD says. “We could be wrong, but if we are, there is little doubt that the peak in interest rates is close at hand.”

CIBC World Markets says that there’s probably not enough until the next rate decision to deter a further rate cut in May. “Given the short time frame until its next decision date in May, with only one more reading due on employment, it’s unlikely that the Bank will see enough signs of a slowdown to eschew a hike to 4.25%,” it says. “By July, however, news of a cooler pace to Q2 growth in both the US and Canada, and a related decision by the Federal Reserve to leave rates on hold at 5% in June, should be enough to convince Governor Dodge that his work is done.”

CIBC says that the risks are that both the Bank of Canada and the US Federal Reserve are, “getting to the point of overkill in their efforts to moderate growth. For one, it isn’t clear that economic growth has in fact been too much of a good thing. Though they will never put it that way, the central bankers are arguing that too many Canadians are working, and that there are too few unemployed, to be consistent with stable inflation.”

@page_break@“Recent interest rate hikes in both the US and Canada could easily tip the economy into a slower-than-3% growth rate by year-end, bringing interest rate cuts in 2007. America’s housing market is clearly decelerating, and weaker housing wealth gains could sap consumer spending power. A slower US economy could in turn shed a harsher light on Canadian manufacturers’ ability to address the “challenges” of a stronger Canadian dollar,” it suggests.

Nevertheless, it believes, “The May interest rate decision is going to come up too soon for the Bank of Canada to see enough signs of a slowdown. We raised our overnight rate forecast last week to 4.25%, and today’s announcement seems consistent with that view that there’s still one more hike to come.”

National Bank Financial notes that the Bank, “seems open-minded in moving forward should the need to offset some of the impacts of the upcoming fiscal stimulus materialize”, with the federal budget coming up on May 2. “This leaves the door open for more rate hikes. While the Canadian dollar is obviously a concern, it appears that our central bank has been comforted by the fact that its latest business outlook suggested that firms are adjusting to the higher currency,” NBF says. “Although the Bank of Canada recognizes that its future moves will increasingly be data-dependent, it is clearly leaning towards a little more tightening. In our opinion, this morning’s press release sets the table for a higher trading range for the Canadian dollar.”