Why Canada Needs a Rate Hike

It's the moment we've all been waiting for; Canada is finally pressed to raise interest rates. I saw this coming after Australia and New Zealand experienced a rapid recovery and their central bank worked to tame it with higher interest rates. Those currencies rallied in response as the rest of the world continued to struggle with stimulating a recovery. The "rest of the world" are those countries with high exposure to the global financial crisis; United States and Euro zone members to be exact. However, there's one special case up north. Oh, Canada with its geographic proximity to the source of the crisis, one wonders why they did not experience severe effects.

Canada has a very conservative banking system with strict regulations from the federal government. Most of the big banks up north did not have much exposure to the complex derivatives that went sour. Also, in response to the crisis, Canada did what most other nations did - enforce a national stimulus package. A stimulus that was focused on investments with a purpose of supporting growth of the markets to fuel recovery. A different approach taken in the United States with a stimulus package, most of which remains unspent, that focused on supporting growth of government.

The industries and consumers of Canada, equipped with the right incentives, are fueling a recovery that continues to beat expectations. an economy expanding beyond planned, Central Banks must act. In Canada, retail sales have increased to a record C$37 Billion and is projected to rise even further, and core consumer prices and inflation rose by 0.3% to 1.8%. Throughout this past year, the Canadian Dollar has outperformed the US Dollar by 7.2%. These positive economic numbers continue to put pressure on the Central Bank of Canada to raise interest rates.

However, there are still issues that may cause the central bank to keep interest rates at the current level of 0.25%. The European Sovereign Debt crisis has created a burden on western markets. One effect is the recent decline of commodity prices, which negatively effects Canada's economy. Perhaps, because of the United States' slow recovery and weak economic data, Canada remains worried. Interest rate management is a tricky part of monetary policy, and the Bank of Canada is weighing the risks. Inflation is rising beyond expectations, the currency is strengthening, and housing prices and household debt continue to rise sparking fears of a housing bubble. However, the debt threats and exposure to the US may cause central bankers to believe that the time isn't right.

There is evident risk in the global market, but the central bank needs to raise rates. Central Bank Governor Mark Carney hinted that there will be no rate increase until July. Economists predict that rates could rise as soon as June. The markets are ready and the pressure is on. Investors should prepare for this, whether it be this month or next. If rates do not increase in June, expect the Canadian dollar to decline as investors express their frustration. If this is so, then we can be certain of a rate increase in July, as planned. Either way, when Canada raises rates, Dantes Outlook will remain long the Canadian Dollar throughout their recovery. Consider Canada the next Australia. Certainly as China demands more commodities, and domestic conditions continue to improve, Canada will do well.