Royal Bank of Canada ‘slip’ make experts and markets ask if interest rate hikes will continue

If you visit the Miratel blog fairly often you’ll know that we essentially saw this one coming. Analysts are leaping up and down over comments made last week by The Bank of Canada which seem to support existing theory that a series of small and slow interest rate hikes will be used to ensure inflation stays in a ‘safe’ range near to the chosen 2 per cent mark.

The reaction was caused by the recent RBC economic forecast that provided their analysis which suggested economic growth had slowed markedly during the last quarter and the remainder  of 2010 would show further expansion but at the continued harnessed rate.  The area that drew attention was concerning projections for consumer pricing which forecasts core inflation to remain at or near 2% for the next two and a half years but a telling caveat from the bank included “this includes a gradual reduction in monetary stimulus consistent with achieving the inflation target.”

Interpretations of the forecast have led to some immediate debate however. The governor, Mark Carney stated that this was not a clear prediction concerning all forthcoming interest rate changes when he said

“Risks around the projection are elevated and there is no preordained path for interest rates in this country,”

His comments resulted in a hasty reply from the RBC’s Craig Wright:.

“In the context of ‘nothing is preordained,’ to me this is sort of an add-on — nothing is preordained except the path is toward higher interest rates, Just how quickly and how high are up for discussion.”

Some are saying a mixed tone has now been set – when rates were increased to 0.75% the central bank attached statements that looked cautious referring to the uncertainty being seen throughout global market and that any future rate changes would merit extremely careful consideration. Markets in turned reacted to the changed landscape it terms of what they expect the banks to do next with interest rates for the remainder of the year. The change in tact was driven by reports of quarterly growth taking a step back from the lofty  4.9% Q4 2009 and 6.1% Q1 2010 to a forecasted range of 3.0% for Q2 and the remainder of the year. Although a moderate let down, overall the numbers are healthier than was foreseen a year ago and overall confidence amongst observers is said to be ‘improving’ as the risk of a double dip recession has now been all but extinguished.

Overall though the news remains good and I think that perhaps some bets are being hedged in the market. There is a strong chance that a conservative and nervous approach is underpinning some of the projections and that the monthly increases in consumer and business confidence may well lead to spending outperforming the forecasted rates. I believe that for the consumer and business owner alike the longer the string of evidence that the recession is truly behind us, the more likely that expansion and purchasing confidence will return to the market.

Read in more detail about The Royal Bank of Canada’s economic forecasts via their site