Laurentian bank released a report earlier in the week outlining how they believe that the Canadian government will be forced to aggressively increase interest rates next year versus a slow, gradual return to “normal” rates.

They believe that:

We think most of the tightening will occur after the jobless rate has peaked (in the first half of 2010) and before total and core inflation get back to the 2% target (in mid-2011)

In this context, the first hike cannot occur before the third quarter of 2010 in our view

Furthermore, an aggressive tightening – rather than a gradual one – will be necessary because interest rates are extremely low

A “measured pace” would not be appropriate to “normalize” rates when the starting point is virtually zero

For argument’s sake, if we assume the Bank hikes by 25 basis points for each of the 12 fixed interest rates decisions in a year and a half starting in July 2010, the overnight rate would be only 3.25% at the end of 2011

This could well prove to be too low for an economy that would be running at a decent pace with inflation already at the 2% target. This means we are likely to see a mix of 50, 75 and even 100 basis points hikes… when the time comes

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