Economists had expected the central bank to hold rates steady, citing the fact that inflation still appears to be under control in Canada.
“We judge that the BoC will want to monitor core CPI for signs of ‘consistency’ for at least a couple months more,” Michael Gregory, senior economist at BMO Capital Markets Economics, said in a report a week ago.
For its part, the Bank of Canada said economic growth in the United States appears to be picking up steam, while emerging markets continue to expand at a robust pace.
But the recent Japanese earthquake will cause supply disruptions, the monetary authority said.
In addition, while Canada’s gross domestic product growth is better than anticipated, the expansion is not setting off inflationary alarm bells, the bank said.
Still, analysts believe that the Bank of Canada should be ready to pull the interest rate trigger as the year progresses.
“Although this stronger growth is not expected to result in an immediate hike in interest rates, the acknowledgement of such will solidify financial market expectations for the return to tightening later this summer,” wrote Paul Ferley, assistant chief economist at RBC Economics.
RBC predicts that the Bank’s overnight rate will rise from the current level of one per cent to three per cent by 2012.
Canada steady, Europe not so
The bank’s decision comes in the face of an interest rate hike in Europe. Earlier in April, the European Central Bank raised its trend-setting rate by one-quarter of one percentage point to 1.25 per cent.
Historically, European monetary authorities have been much quicker to clamp down on economic growth to ease inflationary pressures than either Canada or the United States.
Most central banks have begun worrying that soaring commodity prices, including for foodstuffs, and gathering strength among the world’s major economies could reignite a general round of price hikes in industrialized countries.
But, as of yet, the U.S. Federal Reserve is still taking a “wait-and-see” approach before hiking U.S. rates.
“Most Fed members have made it clear that rising commodity prices are not [the] result of U.S. monetary policy nor does it require a policy response,” noted Camilla Sutton, chief currency strategist at Scotia Capital in a Tuesday note.