OTTAWA – Federal Reserve chairman Alan Greenspan’s conviction the U.S. economy is in a “vigorous expansion” and new evidence that the Canadian economy is picking up steam sparked predictions Wednesday that the Bank of Canada will now raise rates sooner than previously expected.

J.P. Morgan economist Ted Carmichael said the investment bank now anticipates the Bank of Canada will begin raising rates here later this year rather than next year as it had been predicting. His employer’s decision mirrors a decision by the parent company about interest rates in the U.S.

The TD Bank also predicted that rates here will be going up sooner than expected.

“Although the common view on the street is that the Bank of Canada will wait until January 2005 before pulling the trigger, October 2004 seems like a better bet,” said TD economist Marc Levesque.

These predictions follow on two days of testimony by Greenspan to congressional committees and Statistics Canada’s report Wednesday that its barometer of what’s ahead for the economy rose by a stronger-than-expected 0.7 per cent last month, led by strength in manufacturing and a rebound in housing.

Further, Statistics Canada also upwardly revised the increases in the leading economic index for the previous two months. The index is a basket of economic activities that tend to foreshadow the overall future direction of the economy.

The TD Bank’s Levesque said that once the Bank of Canada gets going in October, it will generate a string of rate increases over the following year totalling 2.5 percentage points.

That percentage-point estimate is what it will take to get the bank’s foot off the economic accelerator and bring monetary policy back to neutral.

Additionally the expectation that rates will be rising sooner than previously anticipated follows a warning this week by Bank of Canada governor David Dodge that the period of historically low interest rates is coming to an end and that rates globally will be rising next year.

The view that the rise in rates will be led by the U.S., which was reinforced this week by Greenspan, has also given the depreciated U.S. dollar a boost.

That in turn has pushed the loonie back down to a six-month low of less than 74 cents US, which in turn should ease the squeeze on exporters who have been hurt by last year’s sharp appreciation of the loonie.

The dollar closed at 73.55 cents US Wednesday, down from 73.7 cents US Tuesday and what was more than 78 cents US early this year.

Analysts disagree, however, on where the loonie is going next.

Some, such as those at the Conference Board of Canada, expect the loonie will ease further to 72 cents U.S or less over the coming year.

However, the TD Bank sees the currency rising back up to 78 cents US by year end and then to 79 cents US next year.

“It can be argued that the Canadian dollar remains below its competitive threshold,” Levesque said, noting that the relative purchasing power of the loonie is about 80 cents US.

While Statistics Canada’s index of leading indicators is pointing to increased economic strength, the International Monetary Fund forecast Wednesday that Canada‘s economy will expand by only 2.5 per cent this year, less than the 2.75 per cent being forecast by the Bank of Canada.

Dodge, appearing before a Commons committee, dismissed the difference as statistically insignificant.

Meanwhile, the IMF forecast four per cent growth for the U.S. this year, a prediction that also suggests U.S. interest rates will be rising.

Faster growth has started to boost hiring by American employers, central banker Greenspan told the Joint Economic Committee of Congress in Washington. Worker incomes have yet to rise and trigger higher prices, he added.

“As I have noted previously, the federal funds rate must rise at some point to prevent pressures on price inflation from eventually emerging,” Greenspan said. “As yet, the protracted period of monetary accommodation has not fostered an environment in which broad-based inflation pressures appear to be building.”

J.P. Morgan Chase & Co. moved its forecast for the next rate increase to August from November, economist Dean Maki said in a note to customers. Four consecutive increases of a quarter percentage point may bring the overnight rate to two per cent by year-end, Maki said.

In general, a boost in the rate wouldn’t mean more would necessarily follow, Greenspan said. “There have been many occasions in which we made one move and stop,” Greenspan said. “When we go through protracted moves it is usually a year or so.”

© The Vancouver Sun 2004