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Rates Unchanged, Economy Exceeds Expectations

Bank-of-Canada-Rates No surprise. Canada’s key interest rate is still 0.25%, an all-time low. The Bank of Canada left it unchanged today, and confirmed it should remain unchanged “until the end of the second quarter of 2010.”

(This suggests that prime rate won’t increase before June 30. Fixed mortgage rates are a different story. They’re more independent and are guided instead by the bond market.)

The focal point of today’s report was the Bank of Canada dropping its depressed view of inflation. The Bank now says Canadian inflation risks “are roughly balanced.”

Patricia Croft, Chief Economist, RBC Global Asset Management, translated this for BNN:  “The Bank of Canada is saying, ‘Get Ready. Interest rate hikes are coming.”

Today’s rates “are emergency rates,” she says, “and the emergency has passed.”

Croft added:  “Central bankers have to be forward looking…Monetary policy operates with a lag of 12-24 months, so they have to have their eyes way forward down the road.”

Nonetheless, few economists expect a straight-line, economic recovery. Most anticipate volatile economic numbers for the remainder of the year.

Odds are, prime rate will not go up before July 20 (the BoC’s first meeting after its conditional rate hold commitment ends).

As far as fixed mortgage rates are concerned, Croft said the bond market is “caught in a tug of war” and yields may not jump significantly until 2011.

(That doesn’t mean fixed rates can’t rise 1/4% to 1/2%+ in the next 1-3 months. While not disastrous, 1/4% to 1/2% do add up to more interest costs over five years: Up to $5,900 more on a $250,000 mortgage.)

The 5-year bond yield, which drives fixed mortgage rates, was up slightly to 2.55% today.  For any sustained rise in fixed rates, the 5-year yield will need to hold above 2.90%.

The next BoC rate meeting is April 20.

For more BoC analysis, see:  Economist Reactions