The Bank of Canada has signalled it is likely to raise interest rates in the next few months in response to unexpectedly strong domestic growth, including a housing boom that has shown signs of developing into a speculative bubble.
In its latest monetary policy review on Tuesday the bank said it was maintaining its key overnight lending rate at 0.25 per cent for the time being, but it was “appropriate to begin to lessen the degree of monetary stimulus” with the recent improvement in the economic outlook.
Dropped from the statement was a pledge made repeatedly in recent months not to raise interest rates before the second half of 2010.
“The market is reading that as a signal that they’re going to hike on June 1 [the date of the next policy review],” said Shane Enright, currency strategist at Canadian Imperial Bank of Commerce. “The odds on an early rate hike have increased.”
The Canadian dollar rose above parity with the US dollar immediately after the Bank of Canada’s statement.
The central bank lifted this year’s growth forecast for Canada to 3.7 per cent, adjusted for inflation, from 2.9 per cent previously. However, it now expects the growth rate to slow to 3.1 per cent in 2011, compared with its earlier projection of 3.5 per cent.
The revision was based on stronger growth in other parts of the world, which has boosted the prices of Canada’s commodity exports, the booming domestic housing market and heavy government spending on stimulus projects.
House prices have soared to record levels in Toronto and Vancouver, and bidding wars have become commonplace. The government tightened mortgage lending rules this week in a bid to cool the market.
The Bank of Canada said the extent and timing of monetary tightening would depend on the outlook for economic activity and inflation. It would maintain its 2 per cent inflation target, it said. Meanwhile, it has halted measures to inject extra liquidity into financial markets.