INTEREST RATES: Bank of Canada expected to raise rates, but not yet

The Bank of Canada is not expected to raise interest rates at its scheduled announcement this Tuesday, but it might provide clarity on its intentions on whether it will act earlier than previously planned.

The central bank's overnight lending rate has been set at a record-low 0.25 per cent since last April, when it took unprecedented steps to mitigate the impact of the recession.

Since then, numbers on gross domestic product, employment and -- perhaps most important -- inflation have come in higher than expected.

This has created anticipation for near-term interest-rate hikes from the Bank of Canada.

When the central bank lowered its rate to an all-time low, it said it would keep it there until -- at earliest -- the second half of 2010, which starts in July. But this was "conditional on the inflation outlook," it said at the time.

Policy-makers last year did not expect core inflation to get to an annualized rate of two per cent until the second half of 2011. However, the last two consumer-price index reports had it at this level or more for both February and January.

Economists have been trying to figure out whether these developments will result in an earlier-than-expected rate hike from the Bank of Canada. The next two chances to raise rates after Tuesday are June 1 and July 20.

Avery Shenfeld, chief economist at CIBC World Markets, said the Bank of Canada might as well stick to its original plan. "We would urge the bank to stay with its conditional commitment to keep rates on hold through June," Shenfeld said in a research note. "That delays the first hike by only six weeks, trivial in terms of the economic outcome a year or so hence but helpful if it ever again has to use such a declaration as a means of lowering one-or two-year yields."

Shenfeld and others, such as TD Securities chief economics strategist Eric Lascelles, agree that the interest rate that results from the Bank of Canada's Tuesday announcement is not in question; it's the accompanying statement and the subsequent monetary-policy report on Thursday that matters. "The coming Bank of Canada decision and the accompanying April 22nd monetary-policy report will provide important insight into the timing of the Bank of Canada's first hike," Lascelles wrote in a report Friday. "TD continues to predict a July 20th starting point, but June 1st is still a viable [if lesser] possibility."

When the central bank is done issuing its interest-rate decision and policy report, a certain amount of vindication or second-guessing could follow when Statistics Canada releases March's inflation data on Friday.

The consensus among economists is for annual inflation remaining at 1.6 per cent, unchanged from February, and the core rate -- excluding volatile items -- to ease to 1.9 from 2.1 per cent.

(prepared by Derek Abma/Financial Post/Vancouver Sun)