INTEREST RATES: Experts make rate calls

Last month the Bank of Canada abandoned its pledge to keep interest rates at a record-low 0.25% through the end of June. The bank cited a faster-than-expected economic recovery in terms of job growth and "very strong" housing activity as reasons why it might raise borrowing costs sooner than it originally planned. At the time, some analysts were predicting rates could jump by as much as 50 basis points to 0.75% at its next announcement on June 1. But a lot can change in one month, and as Bank of Canada governor Mark Carney recently told Parliament, "nothing is preordained." Yesterday, figures showed the U.S. core consumer price index fell to just 0.9% year over year -- the lowest reading since January 1966, suggesting interest rates in the United States are likely to remain near zero for some time. While noting that recent events in Europe make the possibility of a major June increase in Canada slightly less likely, economists remain convinced that one is still coming. Here's what some of them had to say:

STEWART HALL, Canadian economist for HSBC Securities

"There is a translation effect across the Atlantic [from the European debt crisis] but I'm still not certain that this would dissuade the Bank of Canada from raising interest rates at the June 1 meeting--one of the things that the BoC might be somewhat nervous about is consumer household debt. But suffice to say don't lay all the blame at the feet of the consumer and spending over the last couple years but rather a lot of that blame can be laid at the feet of monetary policy, which has reduced the cost of funding to the consumer to historically low levels and consumers are really only responding. The Bank of Canada made money extremely cheap and certainly the Canadian consumer indulged in that, but [a rate increase now] would start to reverse that trend."

MICHAEL GREGORY, senior economist for BMO Capital Markets

"The market is now priced in roughly 50/50 odds. Technically there is a 52%chance of [the Bank of Canada] raising interest rates 25 basis points so the market has become quite uncertain. Right after the April 20 statement it was not only priced at 100% but there was even odds of them going 50 basis points. We still believe that they will [raise rates] but it is getting to be a riskier situation, particularly as this sovereign credit risk issue begins to percolate."

ERIC LASCELLES, chief Canada macro strategist for TD Securities

"We haven't gotten a whole lot of comment from the Bank on the subject since [market prices] really started to go downhill but we're of the opinion that the probability of a June hike has diminished to some extent as this [European sovereign debt] crisis has intensified. We're now at the point where our base assumption is they will hike in June and that continues to be the case, but it is really not any better than a 50/50 proposition. It really is a toss-up and I think it is going to be dependent very substantially on the developments as they play out in Europe over the next week and a half or so."

SEBASTIEN LAVOIE, economist for Laurentian Bank Securities

"I think the rate hikes are still going to come. The natural process of what happened in April after they removed their conditional statements will be to raise interest rates. Obviously we didn't expect that much iteration in the Europe front but at one point during the year I still won't be surprised if the bank goes for a 50-basis-point increment just based on the strong economic conditions we're seeing. We are of the view now at Laurentian that the bank will go for a 25-basis-point hike on June 1 but the key here is the bank will not stop after that: There are five decisions at the Bank of Canada left for this year and we think the bank will raise rates in each of those five."

(prepared by Jameson Berkow/Financial Post/National Post)