On July 19, before stock markets and the global economy had their wildest month in years, Bank of Canada Governor Mark Carney left many with the distinct impression he would be raising interest rates again by the end of the year, and probably more than once.
Mr. Carney kept his benchmark rate at 1 per cent for a seventh consecutive time that day, but put Canadians on notice that he was prepared to lift borrowing costs even in the face of trouble on both sides of the Atlantic, if such a move were needed to contain hotter-than-expected inflation.
The central banker did this by dropping the word "eventually'' from a sentence in his decision that hinted at when he might start tightening policy after almost a year on hold.
Even as he backpedalled a bit at a news conference the next day in Ottawa, stressing that "considerable headwinds'' facing the economy might warrant staying on the sidelines for even longer, most economists pencilled in 75 or 100 basis points worth of hikes by mid-2012.
Well, that was sooooo six weeks ago.
Now, with worries about another U.S. recession mounting, along with a growing realization that Canada's economy would probably be pulled under should that occur, rate increases are out the window for 2011 and much of 2012.
Significantly, considering how recently so-called inflation hawks were fretting that the recovery was proceeding quickly enough that Mr. Carney was at grave risk of losing his grip on price gains, there is even some early talk his next move could be a cut.
That would be his first easing since April, 2009, when he brought rates to as low as they could go (0.25 per cent) and committed to leaving them steady for more than a year as long as inflation showed no sign of flaring.
Markets tied to interest-rate moves are betting on a reduction in Canada's overnight rate by next March and at one point investors speculated that could happen by December, according to a report from Michael Gregory, a senior economist at BMO Nesbitt Burns in Toronto.
A rate cut is certainly far from inconceivable.
Mr. Carney warned last week at an emergency meeting of the House of Commons finance committee that the economy stalled and maybe even shrank in the second quarter. Plus, while policy makers and analysts don't see another downturn in the U.S. or globally as the likeliest scenario for the coming months, everyone seems more worried about the prospect.
Still, unless things get markedly worse over the next few weeks, it would be foolish to count on rate hikes, for three reasons.
First, a policy rate of 1 per cent is still very stimulative. It's unclear that lowering the rate would do much to spur borrowing and spending, with so many consumers tapped out and preoccupied with trimming the debt loads they've piled up over 2-1/2 years of ultracheap credit.
Second, with inflation cooling down and with the Federal Reserve committed to keeping U.S. borrowing costs at rock-bottom levels "at least through mid-2013,'' Mr. Carney can be expected to move at a glacial pace -- a form of stimulus in itself. Even though Mr. Carney has been at pains to remind observers that he does not ``outsource'' monetary policy to the Fed, he also has acknowledged there is a "limit to the divergence'' between Canadian and U.S. rates.
Indeed, one of the biggest headwinds the domestic economy is grappling with is the high Canadian dollar, which could soar into orbit should Mr. Carney raise his rate too many times before the Fed starts to catch up.
``We still judge that the next move by the Bank will be a hike,'' Mr. Gregory wrote in his report, a draft of which was circulated Thursday. ``However, the current pause could last a long time.''
Mr. Gregory surmises the hiatus could last until the middle of next year, and that the central bank won't raise rates more than once per quarter until the Fed gets back into the tightening game.
Finally, and most important, Mr. Carney has warned repeatedly about the financial risks of leaving borrowing costs too low for too long. The biggest among those, of course, is households getting in over their heads with record levels of debt that won't be as manageable once rates start to rise. There is also the related problem of an overvalued housing market that in some cities -- Vancouver, for instance -- looks like a bubble in all but name.
Given how much intellectual energy Mr. Carney and his legion of analysts at the central bank have put into ensuring that Canadians are aware of those risks and doing their part to mitigate them, it stretches the imagination to think policy makers would chance exacerbating the problem.
``It is likely that given the recent excess household debt and the continued increase in house prices the [Bank of Canada] would be very reluctant to cut rates at this point and fuel even bigger excesses,'' Charles St-Arnaud, a Canada specialist at Nomura Securities in New York, wrote Thursday in a commentary. ``We think that it is very unlikely for the BoC to cut rates at this juncture and it would require further deterioration in the financial markets and a recession.''