Posted by: Daryl & Wendy Ashby | March 1, 2010

Bay Street Abuzz

While much of the buzz in Ottawa is about next week’s budget, most economists appear just as interested – and perhaps more so — in what Mark Carney, the Bank of Canada governor, has to say Tuesday about the future path of interest rates. There has been much interest over the fourth-quarter GDP.

The C.D. Howe Institute — which released a paper this week about the need for “steep” rate hikes later this year – said Thursday its shadow monetary policy group suggested Mr. Carney should keep its benchmark rate at 0.25% but raise it to 0.75% by September.

“The group’s call reflected a number of strong contrasts, both in current information on economic growth and inflation, and in members’ expectations and assessments of risks, the think-tank’s group said in its statement. In a year’s time, members of the shadow central bank envisage the key interest rate at a level ranging from a low of 1.5% to 3.25%.

Meanwhile, economists at Scotia Capital told clients in a note that the sort of steep rate hikes advocated, like in the C.D. Howe paper, “would be unwise.” It prefers, instead, rates to head toward the 2.25% level by next spring, and then a “pause to evaluate the consequences and maintain monetary policy support while many other supports are wilting.”

Further, Scotia Capital said Mr. Carney should continue to provide extraordinary guidance as its benchmark rate heads upward. “Markets are not fully prepared for the hikes we think lie in the cards,” said the note, written by economists Derek Holt and Karen Cordes. “… Guidance will be important to prevent taking the emergency punch bowl away from short-circuiting a fragile recovery.”

Finally, TD Securities’ chief economist, Eric Lascelles, said in an analysis  that the pending Bank of Canada statement would feature “few substantive” changes. Still, he said, Mr. Carney and his governing council “will have to think hard about possible wording changes at subsequent meeting to properly set expectations post-conditional commitment.”

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