“In Canada, the economic expansion is proceeding largely as expected…”
“…Financial conditions remain very stimulative.”
“To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn.”
“…high (commodity) prices, combined with persistent excess demand conditions in major emerging-market economies, are contributing to broader global inflationary pressures.”
“…total CPI inflation [will remain] above 3 per cent in the short term…[and] converge with core inflation at 2 per cent by the middle of 2012…”
The next interest rate decision is scheduled for July 19, though most economists believe the Bank won’t resume tightening monetary policy until September or later.
The financial markets are looking even further out. Overnight index swaps (OIS), which are widely followed derivatives that track Bank of Canada rate expectations, are not fully pricing-in the next rate increase until February 2012 (Source: Westpac). That’s changed radically since March when the OIS market expected a July hike.
At the recent Dominion Lending Centres conference, CIBC economist Benjamin Tal talked about the OIS market. He said that while OIS is not a great predictor (because it changes frequently), it’s more accurate than economists’ consensus forecasts.
Tal also explained that a “normal” Bank of Canada policy rate is 3.00-3.50% (versus today’s 1.00%). “The question,” he added, “is whether or not this 3.00-3.50% is reached in 2012 or 2013.
“I think it’s a 2013 story,” he said.
Steve Huebl and Rob McLister, CMT
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