TD Economics says that the latest interest rate hike is nothing to worry about.

The bank had forecast that the Bank of Canada’s benchmark overnight rate would peak at 4.00% in mid-2006. “If we had been conducting policy, rates would have been left on hold. But, like most sore losers, we’ll now argue that the last hike is no big deal,” write David Tulk, economist, in a new report.

“The central bank’s latest decision has sparked a considerable amount of criticism, most of which is a bit unfair,” Tulk says. “The focus has been on the fact that rates have been increased seven times in a row, that the increase in borrowing costs has eroded housing affordability, and that rate increases have contributed to the strength in the Canadian dollar.”

“A more sober assessment reveals two important observations: First, it is the level – not the change – in interest rates that is of critical importance to the economy. Second, the interest rates actually faced by consumers have not moved to the same degree as the Bank’s overnight rate,” Tulk points out. “When these two observations are taken into consideration, it is evident that there is nothing especially damaging about the current conduct of monetary policy and while we would have stopped at 4.00%, the extra 25 basis points won’t break the economy.”

“Despite the seven rate increases by the Bank of Canada, the level of the overnight rate remains fairly low,” Tulk concludes. “And, it is not just the level of the Bank’s benchmark overnight rate that matters, but the level of market interest rates across the entire yield curve that determines the borrowing cost for consumers and businesses. On this front, interest rates across the yield curve are not significantly restrictive.”

“The big news is that it appears the Bank is set to pause, and despite the fact that they are set to do so at a rate that is 25 basis points higher than what we had predicted, we firmly believe that it is the prudent decision at this juncture,” Tulk says.