Today's summary of the Bank of Canada decision:

Interest rates stay at 1% Tuesday.

However, Mr. Carney’s comments send the clearest and most hawkish signal yet that rates will be moving higher — but precisely when remains to be seen.

“In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2% inflation target over the medium term,” Mr. Carney said. “The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.”

Here’s a look at the factors Mr. Carney cites as a basis for this conclusion:

The global outlook is on the upswing

Since the bank released its January Monetary Policy Report, there have been signs of improvement around the world. Europe is now expected to “emerge slowly from recession” in the second half of the year, although the risks remain high. The U.S. is benefiting from somewhat improved labour markets, financial conditions and confidence, as well as fiscal consolidation and household deleveraging. Meanwhile, emerging market economies will “moderate to a still-robust” pace supported by an easing of macroeconomic policies.

Canada’s economy firmer than expected; 2012 growth boosted

The bank has hiked its GDP forecast for 2012 higher, to 2.4% from 2.0%. “The external headwinds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated,” the bank said. “As a result, business and household confidence are improving faster than forecast in January.” Mr. Carney expects domestic demand and consumption to remain the primary driver of the economy, again warning that household debt burdens are still the biggest domestic risk. Business investment will remain robust, but government spending contributions will be modest.

But 2013 growth will slow

On the other hand the bank has also trimmed its forecast for 2013 growth to 2.4% from 2.8%, returning to full capacity in the first half of that year, while maintaining a 2.2% outlook for 2014. “The BoC is signalling that it does not expect growth to materially outstrip potential growth, or the speed limit of the economy,” Mr. Holt said. “While spare capacity may close in 2013H1 it won’t trip materially into excess demand that would spark deeper inflation concerns. That’s why the guidance here is toward ‘modest’ rate hikes.”

Speaking of inflation

Mr. Carney also characterized inflation as “somewhat firmer than anticipated” in January. Total CPI inflation is expected, along with core inflation, to be around 2% for the foreseeable future. This fits with the more hawkish tone, as Mr. Carney had previously forecast inflation to ease to 1.7% for both headline and core by the fourth quarter, Mr. Porter said. “The bank is clearly uncomfortable with keeping interest rates below inflation when household debt continues to grind higher.”

The loonie will be a factor

The loonie, meanwhile, is spiking higher, up a penny and rising. Mr. Holt suspects that fiscal tightening has not been priced into the dollar and its movements will be a limiting factor on the BoC’s policy flexibility.

Commodities are still elevated

Improving global economic prospects, supply disruptions and geopolitical risk have also kept commodities prices higher, particularly oil. However, international oil is now “considerably higher than that received by Canadian producers” — a possible reference to the supply bottleneck at Cushing, Okla. that has contributed to the price gap between North American crude and London Brent. “If sustained, these oil price developments could dampen the improvement in economic momentum.” As well, exports will remain constrained due to the persistent strength of the dollar.

Read the Full article: http://natpo.st/IumE9l

Denis Hrstic
AWESOME REALTOR® http://www.MyHomeAgent.ca