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