INTEREST RATES: Bank of Canada boosts benchmark rate

The Bank of Canada raised its benchmark policy rate Tuesday by 25 basis points to 0.75 per cent, even though it scaled back its growth outlook on the belief budget cutting among households and governments in advanced economies will "temper" the pace of the global recovery.

Many of Canada's commercial banks followed suit by raising their prime lending rates.

The central bank acknowledged the economy is weaker than initially believed -- but not feeble enough to call off yet another rate hike and likely more in the future.

Certainly, the interest-rate decision delivered Tuesday, which pushed the benchmark rate upward another 25 basis points to 0.75 per cent, teemed with caution. The central bank's statement accompanying its decision highlighted how a "greater emphasis" on budget cutting among governments and households would slow the pace of the global recovery.

Domestically, it noted the housing market fell "markedly" from previous high levels. Further, eye-popping job creation over the past three months wasn't enough to hide the central bank's disappointment that business investment in machinery and equipment remained tepid due to global uncertainty.

All said, the central bank shaved a few tenths from its growth forecast, now anticipating 3.5 per cent and 2.9 per cent expansion this year and next, compared to previous projection of 3.7 per cent and 3.1 per cent, respectively. More detail is likely to emerge on Thursday when the central bank unveils its latest economic outlook.

As one analyst put it, however, the central bank might be engaged in a game of poker in which it wants to keep people guessing as to its next move.

"They are not sure if the pair of jacks they are holding are a winning hand," said Avery Shenfeld, chief economist at CIBC World Markets. As a result, the bank doesn't want the market "to price in a whole host of rate hikes all at once."

What the Bank of Canada did accomplish, analysts say, was to buy itself more time to undertake its rate-hiking campaign by signalling economic slack won't be absorbed as quickly as initially believed. The central bank said the economy would not reach full potential -- at which time interest rates should be at a neutral level -- until the end of 2011, or six months later than initially expected.

"They have gotten a little more flexibility to raise rates over time -- but raise rates they will," said Michael Gregory, senior economist at BMO Capital Markets.

Shenfeld said this statement was much like the last one issued on June 1, in that it contained identical "fuzzy language" about the future path of interest rates.

"Just as that language in June did not prevent a rate hike in July, it
should not be viewed as a sign that [Gov. Mark] Carney's team will step away from rate hikes just yet," he said. "This is still an economy that in absolute terms is doing rather well -- and hard to justify keeping rates at 0.75 per cent."

At least three of the big chartered banks matched the Bank of Canada's move, by increasing their prime rate by 25 basis points to 2.75 per cent, and other lenders are expected to follow.

(prepared by Paul Veira/Vancouver Sun)