Bank of Canada to Raise Rate 7th Time, Then Pause, Survey Says
May 19 (Bloomberg) -- The Bank of Canada will probably raise its main interest rate next week and then pause, deciding that seven straight increases are enough to keep inflation in check without triggering a currency surge, analysts said.
The central bank will raise its target rate for overnight loans between commercial banks a quarter point to 4.25 percent, the highest since August 2001, according to 14 of 21 analysts surveyed by Bloomberg News. The rate announcement is scheduled for May 24 at 9 a.m. Toronto time. The bank will then pause through at least September, the survey showed.
Canada's economy will grow 3.1 percent this year, the fastest pace in six years, the Bank of Canada predicted last month. A 31-year-low jobless rate and record prices for exports such as natural gas, crude oil and gold are fueling the world's eighth-largest economy, which central bank Governor David Dodge said will be at full capacity through next year.
``There is enough forward momentum there to keep things growing at a healthy rate,'' said Jonathan Basile, an economist at Credit Suisse Holdings in New York. A rate increase will serve as ``insurance'' against rapid inflation, he said.
A seventh increase would bring the total gain in the benchmark rate since September to 1.75 percentage points, the largest cumulative move since a period that spanned 1997 and 1998. The central bank said last month it would study the impact of past rate increases before deciding whether to keep going. Higher rates might deter borrowing and spending, slowing growth.
Higher Dollar
So far, the main effect is a higher currency. Canada's dollar surged to a 28-year high of 91.10 U.S. cents May 9 from 87.92 U.S. cents on April 24, a day before Dodge last raised rates and signaled that another move may be needed to keep inflation at the central bank's 2 percent target.
Dodge said May 3 that the dollar's rise after his April announcement wasn't closely tied to demand for the country's goods. Some economists say the remark signaled the central bank's unwillingness to keep raising rates after next week.
``We have to give a break to give companies time to adjust to the Canadian dollar,'' Clement Gignac, chief economist at National Bank Financial in Montreal. ``The Bank of Canada will be well advised to go on the sidelines'' next week, he said.
Exports to the U.S. make up a third of Canada's C$1.1 trillion economy. A higher currency makes Canadian goods more expensive to foreign customers and thus threatens manufacturers who make products for overseas markets.
Cheaper Imports
At the same time, the dollar is slowing inflation by lowering the cost of imported goods and pressuring domestic companies' prices. While a report yesterday showed that consumer inflation remained above the central bank's 2 percent target in April, rising 2.4 percent from a year earlier, the bank will probably ``signal a pause'' next week, said Doug Porter, an economist with BMO Nesbitt Burns in Toronto.
The core inflation rate, which the central bank also uses as a guide to future price trends |
