Economists are divided over the pace of future rate hikes following Tuesday’s decision by the Bank of Canada to raise interest rates by 25 basis points.

RBC says that with the hike, commercial banks’ prime rates are expected to move from 4.50% to 4.75% later today. “There was basically a 50-50 chance rates would be hiked in March or April, and the Bank opted for March for two reasons. First, inflation surprised on the upside in January by rising to 4.5% on the headline rate and 3.3% on the core, both 12-year highs. Two, even with the uncertainty caused by the threat of war and the effects that might have on the U.S. (and, hence, Canadian) economy, the Bank would probably cause more confusion by holding off after its recent tough talk.”

TD Bank says that no one can accuse the Bank of being vague and confusing with its reasoning for the hike, as it justified its move with what is probably its longest and most detailed post-meeting statement on record. “And, arguably, if the Bank went through such lengths to spell out the reasons for this morning’s decision, it is because the optics are not in the Bank’s favour, especially in light of last week’s weaker than expected GDP report. Ultimately, however, the Bank of Canada’s decision was the right one to take.”

“The Bank’s tightening schedule does not end here — far from it,” TD predicts. “We are betting on an additional 100 basis points by the end of 2003, although the timing of the next move remains highly uncertain. The Bank will undoubtedly remain cautious until the U.S. economy firms up and the geopolitical landscape improves — which implies that it will probably hold the line at its next confab on April 15. But beyond that, further tightening is in the cards — a boon for the Canadian dollar, which will climb to 69 U.S. cents by the end of the year.”

CIBC World Markets, which had called for no rate hike, is more critical of the move. It says, “The Bank of Canada had boxed itself in, repeatedly promising to raise rates to contain growth, and finding itself carrying through on that threat even as the economic numbers began to disappoint. A moderation in growth from the past four-quarter’s near-4% average should be a cure for a troubling 3.3% core inflation rate, as the Bank itself believes. But while the Bank’s rate hike was designed to send a message that it was on the case, what’s much less evident is that the economy needs that belt tightening.”

CIBC reports that the market is moving to price in additional rate hikes now that the Bank has put action behind its hawkish words. “Dodge likely expects to be raising rates again at the next meeting. But the April 15 rate setting date could come amidst an active war in Iraq — not an opportune time to be sending the Canadian economy another message about the need for a moderation in economic growth. If so, that would mark June 3 as the next spot on the calendar for a serious consideration of interest rate policy.” CIBC believes that by June several developments could allow a further deferral in hikes.

“A quarter-point hike won’t materially dampen near term GDP growth. The Canadian dollar is now overshooting our mid-year target (but still has some distance to go towards our 70¢ year end call), but it might retreat a bit from now to mid year on the combination of a US war victory and a delayed further tightening by the Bank,” CIBC concludes.

Still, RBC sees another rate hike as likely in mid-April, with more following at each meeting throughout the year. It notes that the Canadian economy is operating closer to full capacity than the Bank expected, which means capacity pressures will get worse if rates don’t rise, particularly once the U.S. economy gets going again. “The Bank of Canada’s revised estimate of the output gap is now closer to our own internal estimate which last year made us stand out as an outlier among forecasters with our call for an early start to rate hikes,” it notes.