Canadian Interest Rates Expected to Rise Amid U.S. Inflation Concerns

North American financial markets are experiencing a surge in jitters over U.S. inflation, leading to increased interest rates and raising fears that Canadian prime and mortgage rates may climb soon. The upward pressure on treasury bill rates is expected to push the Bank of Canada rate up by about 20 basis points today, returning it to its highest point this year. Analysts warn that Canadian rates are likely to follow U.S. rates, leading to higher prime and mortgage rates across the board.

Key Takeaways:

• The Bank of Canada rate is expected to rise by 20 basis points today, pushing it back up to its highest point this year, after falling 19 basis points to 6.07 per cent last Tuesday.
• Analysts expect Canadian rates to increase in lockstep with U.S. rates, leading to higher prime and mortgage rates across the board.
• The National Association of Purchasing Managers reported a larger-than-expected gain in its index in April, indicating that price pressures could be around the corner in the U.S.
• Alan Greenspan, chairman of the Federal Reserve, is on a mission to raise the federal funds rate to 4 per cent, which would lead to higher Canadian rates if implemented.
• The dollar has been under pressure since the U.S. began raising interest rates on Feb. 4, and is currently changing hands at 72.36 cents (U.S.).
• Mortgage loans have climbed three times in March, taking the five-year rate to 9.50 per cent, from 7.25 per cent at the beginning of the year.
• Weakness in the dollar is giving producers of natural resources an edge in markets outside the country, but higher interest rates threaten to slow sales of houses, cars, and other big-ticket items.
• The size of deficits expected in Ontario and Quebec's budgets, and the potential for the separatist Parti Quebecois to form government in Quebec, will further contribute to the upward pressure on Canadian rates.

Statistics:

• The Bank of Canada rate is expected to rise by 20 basis points today.
• The U.S. Federal Reserve has already raised the federal funds rate three times since Feb 4.
• The National Association of Purchasing Managers reported a 4.4% increase in its index in April, a larger-than-expected gain.
• The current dollar exchange rate is 72.36 cents (U.S.), an increase of 0.04 cents from Friday.
• The five-year mortgage rate has increased to 9.50% from 7.25% at the beginning of the year.

Sources:

• Toronto-Dominion Bank: John Whale, vice-president of money markets.
• Wood Gundy Inc.: Michael Gregory, senior analyst.
• National Association of Purchasing Managers: April report.
• Federal Reserve: Alan Greenspan, chairman.
• Bank of Canada: Current interest rate.