An unusual suspense is building up over the Bank of Canada's interest rate decision, as people are keen to know whether the central bank would announce anything new in its statement to naught the anticipations of the market regarding a hike in the interest rate early this year.
A week's information that indicated that a major economic retardation is in progress in Canada notwithstanding, the price of fixed-income markets persist at 50-50 probability in the case of an increase in the key policy rate of Canada's central bank in March and a 100 per cent possibility of it taking place in April. Nevertheless, majority of the economists at the major banks in Canada do not foresee a hike in the interest rates till July this year considering the recent vulnerability in trade as well as real estate investment coupled with the ambiguity set off owing to the recurrence of the debt woes of Europe.
According to the deputy chief economist at BMO Capital Markets Douglas Porter, the Canadian central bank is likely to advocate a more appeasing or dovish tone in its statement simply owing to the fact that the market has been somewhat belligerent while pricing in (fiscal policy) tautening.
The return on the Government of Canada's two-year bond, which is being seen as an indirect hint regarding the direction to which the interest rate of the central bank is headed, rose gradually during November last as information regarding the economic recovery poured in from the United States as well as other places and touched a high of 1.74 per cent on November 25, 2010. Nevertheless, the rate plummeted somewhat to the range of 1.6 per cent as of Friday last.
What has, however, compounded the matters is an inflation evaluation in October 2010 that astonished on the flipside with a heading and the basic impressions saying that both would increase 0.4 per cent on a month-to-month period eventually to touch the annual interest rates of 2.4 per cent and 1.8 per cent respectively. In fact, the central bank lays down polices with a view to beat as well as maintain an annual inflation of 2 per cent.
The chief economist with CIBC World Markets Avery Shenfeld said that he was not sure whether the Bank of Canada is aware what it would be doing during the ensuing spring to talk assertively at this juncture. In fact, there are varying views regarding the pace at which the Bank of Canada would take initiatives to increase its main rates during 2011. Precisely speaking, the fiscal policy council at the C. D. Howe Institute, which comprises economists and academics from Bay Street, are divided over what would be happening to the standard rate around six months from hence. While some are of the view that the rate would remain as it is now, there are other groups who are of the opinion that the hike in the rates may vary from just one per cent to as high as 2.25 per cent.
Statistics relating to a comparatively weak third quarter GDP, which is at just one per cent year-to-year, much lower than 1.6 per cent, the forecast made by the central bank, coupled with the November labor data that presents varying reactions - from mixed to unsatisfactory, have been instrumental in providing new ammunition for people who think that the central bank ought to continue on an extended rate-hike break.
Davis Madani, an analyst at Capital Economics, is of the view that Mark Carney, the central bank governor, may well need mull over cutting the rates. Madani expects that the words in the rate statement of the central bank concerning the productivity growth as well as the anticipated inflation should be mitigated to manifest the disheartening character of the data being received. Madani further said that the current forecast of the central bank of 2.6 per cent annual growth in the last three months of 2010 now appears to be far more positive compared to what is prevalent, especially following the revelation of the fact that the economy was constricted in October last.
In addition, economic analysts also said that the Bank of Canada is like to be vigilant regarding the increase in the rate provided that the Federal Reserve move ahead with its asset US purchase plan worth $600 billion - something that is likely to keep the exchange rate of loonie high and, therefore, make sales in foreign lands all the more difficult. (It may be noted that the profit from trade was a major haul on the growth during the third quarter).
Nevertheless, people who anticipate a hike in rate during early this year disagree. According to them, the statement of the central bank was likely to underline the progressing financial data worldwide right from Asia to Germany and the United States and, at the same time, in spite of the non-farm labor force. They were of the view that the central bank's statement was likely to counterbalance a few of the relatively weak domestic appraisals.
An economist at the HSBC Securities Canada, Stewart Hall opined that the Bank of Canada is likely to continue to be anxious regarding the unprecedented levels of debts by households in the country. At the same time, the GDP report emphasized a decline in the savings rate from 6.1 per cent to 3.3 per cent during the current the quarter compared to the previous quarter. Hall, who had forecast the rate hike in March, said that this is definitely an important factor which is effective in preparing the policy mix.
