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Bank of Canada will follow Fed rate action: Swiss Re


July 4, 2004   by Canadian Underwriter


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Commenting on the decision of the U.S. Federal Reserve Board to raise interest rates, Swiss Re says The Bank of Canada will soon follow suit, but at a much slower pace.
The Fed raised the target federal funds rate by 25 basis points to 1.25%, in response to a strengthening U.S. economy and rising inflation, notes Swiss Re’s chief economist Kurt Karl. “This is the first in many rate hikes, which will likely take the federal funds rate to 2.25% at the end of this year and 4.0% by the end of 2005.”
A rapid rise in growth or inflation could induce the Fed to raise rates more sharply, Karl notes, particularly in 2005. “With robust consumer spending and healthy business investment, growth is likely to remain strong over the next 12 months. Hence, increasing attention will be devoted to inflation indicators and their implication for Fed policy.” However, the “implied strategy” of the Fed thus far is to raise rates by 25 basis points at a time.
In Canada, the economy has “mostly recovered” from the events of 2003, likely leading The Bank of Canada to raise rates by 50 basis points by the end of 2004, Karl predicts.
He does not expect the European Central bank to raise rates by the end of 2004, nor will the Bank of Japan move quickly on rates unless there are clear signs of inflationary pressure. The U.K. could see rate action, but it is likely to be slow in pace, reaching 4.75% by the end of this year.


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