INTEREST RATES: Interest rates, inflation highlight week's economic news

Interest rates and inflation are among the principle subjects of this week's Canadian economic news.

On Tuesday, the Bank of Canada is scheduled to issue a decision on interest rates. It's expected to keep the overnight interest rate at a historically low 0.25 per cent and restate the commitment to keep it that way until the second half of this year.

When the bank put interest rates this low in April last year in an effort to ward off a frightening economic downturn, it said the rates would remain at that level until the end of 2010's second quarter, barring any unexpected rise in the inflation threat.

Speaking of which, Statistics Canada will report December's inflation rate on Wednesday. Based on economists' forecasts, consumer price gains should be right about where policy-makers want them -- near two per cent. The annual inflation rate is expected to come in at 1.8 per cent overall, up from one per cent in November. The core rate, stripping out volatile items such as energy and some foods, is anticipated to be 1.9 per cent, up from 1.5 per cent a month earlier.

Such expectations simply add more credence to expectations the Bank of Canada is not about to budge on interest rates, despite recent signs of tightening monetary policies in China.

Nonetheless, much attention will be paid to the bank's announcement on Tuesday and its subsequent monetary policy report Thursday for assessments of progress in recovery from recession.

"Expect [Bank of Canada Governor Mark] Carney's tone to show greater confidence that the anticipated recovery is indeed underway, but a maintained commitment to stand by [on interest rates] until mid-year given still-substantial economic slack," CIBC World Markets chief economist Avery Shenfeld said in a research note issued Friday.

Investors, mortgage holders and others might want to brace themselves for the inevitable, when the central bank indicates it is finally ready to start increasing interest rates. But there's still some time to go before that happens, it would seem.

"There is little doubt that things will get interesting for the Bank of Canada sometime this year," said TD Securities chief rates strategist Eric Lascelles in a report. "It is simply premature for the fireworks to start quite yet."

Though the market consensus on inflation paints a rosy picture, the estimates are certainly not unanimous. Millan Mulraine, economics strategist with TD Securities, expects headline annual inflation of just 1.3 per cent and core inflation of 1.4 per cent

(prepared by Derek Abma/Financial PostVancouver Sun)