8 June 2010
• The BoC often paused its rate increases, sometimes even more than once in a cycle
• The BoC proved it will continue rate increase tendency even with core CPI inflation below its 2% target (mostly, because the BoC tries to go ahead of inflation – it takes about a year for rate hikes to work through the economy).
• During the past four cycles rates rose for 200 basis points over 18 months
BMO thinks the Bank of Canada makes the decision after serious consideration of five “C’s:”
2. Canadian dollar
3. Core CPI (inflation)
4. Cross-border exports (to the U.S.)
5. Crises (economic, financial, or geopolitical)
Today the last item seems to be the most important, mostly due to the European debt crisis. Nevertheless, BMO says: “We believe that in time the domestic data will become more important for the BoC and the new tightening cycle will toe the stylized line.”
In the end, BMO forecasts concern European crisis solution. As a result, the BoC will continue its way to more normalized (it means higher) interest rates.