The Bank of Canada hiked rates another 25 basis points on Wednesday morning, and left some economists with the impression that it may yet continue to hike.

In the policy statement accompanying Wednesday’s rate decision, the bank indicated that further rate hikes will be “carefully considered in light of the unusual uncertainty surrounding the outlook.” That outlook has dimmed somewhat of late, leading some economists to expect that the central bank will be pausing its hikes. Indeed, while Wednesday’s rate rise was widely expected, it wasn’t viewed as a slam dunk.

Ahead of Wednesday’s announcement, a common view was that the bank would suggest that the rate hikes may cease while the recovery falters. But the bank didn’t seem to tack very far in that direction.

HSBC Securities (Canada) Inc. says that the statement’s tone “is considerably firmer than may have been anticipated”, and that it “to some extent challenges the market view” that Wednesday’s meeting would mark the a pause in the rate hiking cycle. HSBC is one of the few market observers that is expecting the bank to continue its rate hikes this year.

TD Economics says that it is “evident from the communiqué that the bank is in highly reactive mode. In the absence of clarity surrounding the outlook, there is no commitment or hint to either a pause in the tightening cycle or the continued gradual nudging of interest rate higher. Key economic and financial indicators over the next six weeks will ultimately decide the next decision on October 20.”

Economists at RBC Capital Markets say that “lingering worries about the U.S. economic outlook will likely be a contributing factor to the Bank of Canada stepping to the sidelines.” While domestic conditions remain very expansionary, the weaker external environment will hamper Canada’s recovery, it suggests. “Against this backdrop, we expect the bank to hold the policy rate at 1% to assess the effect of the 75 bps of tightening undertaken to date on the domestic economy,” it says. However, it also suggests that the pause will be a brief one.

TD says that the odds favour the Bank of Canada pausing for some time. It currently does not anticipate another tightening before March of next year. TD says that the bank’s view on the economy in the July Monetary Policy Report is far too rosy, and the fact that in today’s statement it suggests that its view has dimmed, but only slightly, “raises the possibility that the bank remains too optimistic.”

In the opinion of TD Economics, the Canadian economy will be hard pressed to expand by 2% next year, it says, noting that it faces both external and domestic headwinds. While the bank anticipated in July that the economy will be back to full capacity by the end of 2011, TD Economics anticipates that it will take at least two quarters longer to reach that goal.

“The implication is that soft economic numbers are anticipated in the coming months. Indeed, we expect that the unemployment rate could edge higher in the near term and core inflation is expected to dip towards 1.4% in early 2011. This outlook suggests that a pause in the tightening cycle could easily occur,” TD concludes.

However, BMO Capital Markets observes that the Bank of Canada clearly retains its tightening bias, and it observes that it “seems generally unfazed by the recent cooling in the Canadian economy.”

“While we had been expecting the Bank to now move to the sidelines for a spell, it appears that it will take a deeper slowdown in domestic spending (as we suspect) than what we have seen so far to prompt them to stop raising rates,” it concludes.

National Bank Financial agrees that the overall tone of the report does not suggest that the bank is getting ready to pause in its rate increases. It says its own assessment about the downside risks to global recovery in the second half of 2010 is gloomier than the Bank of Canada seems to hold.

“We feel that a tactical pause this month would have been easily justified given the loss of economic momentum already apparent in the U.S. and starting to show in the Euro-zone. Unless more clouds gather on the horizon over the coming weeks, our forecast calling for a 1.5% overnight rate with a Canadian dollar at par against the USD by Q1 2011 will occur faster than what we had envisaged,” it says.

IE