After studying the economic indicators that the Bank of Canada follows, Bank of Montreal says interest rates are almost certainly heading higher.

“With the economic recovery shifting into a higher gear, the Bank of Canada will likely begin unwinding the excessive monetary stimulus on September 8,” says the report from BMO senior economist, Sal Guatieri.

He reports that overnight rates are expected to climb in increments of 25 basis points at each of the three remaining fixed announcement dates this year. Rates are projected to climb gradually from a current 2.0% towards more neutral levels of around 4.5% by the middle of 2006.

Guatieri puts the chance of a rate hike by September 8 at 80%, rising to 90% by October 19.

The strength in the dollar is the only one of 16 policy considerations that BMO sees weighing in favour of lower rates. “Although the trade-weighted value of the Canadian dollar has risen only modestly in recent months, its 17% advance since early 2003 presents a significant downside risk to the economy,” Guatieri warns.

However, it lists just four factors as neutral for policy, and the other 11 all pointing to higher rates, including: real GDP, output gap, inflation expectations, house prices, commodity prices, and the direction of U.S. rates.