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Bank of Canada could raise rates half a per cent this year, says RBC outlook

TORONTO - An improvement in the U.S. economy this year would be a boon for Canada — and that could push the central bank to raise interest rates before the end of the year.

A global outlook from Royal Bank predicts that the Bank of Canada will boost rates by as much as half a percentage point.

Mark Chandler, head of fixed income and currency strategy at RBC Capital Markets, said Thursday in a conference call that the move would hinge on Canadian economic growth keeping its momentum, rather than slowing as it did in late 2012.

"The Bank of Canada should be the only major central bank to actually make the move to tighten this year," he said.

"We're looking for 50 basis points in aggregate tightening skewed toward late this year."

Economists have been divided over whether the central bank will boost rates this year or in early 2014. Bank of Montreal deputy chief economist Doug Porter expects the BoC to keep interest rates on hold for the year, while a report from TD Bank targets the overnight rate to climb half a percentage point in the fourth quarter.

Signs of improvement in the domestic economy have materialized over the past few weeks, with the December jobs report showing Canada created 40,000 jobs for the month, all of it coming from prized full-time positions. The unemployment rate fell to its lowest in four years.

Royal Bank suggested that if the U.S. economy continues to pick up the pace, then demand will climb for some of Canada's biggest exports into the latter half of 2013.

The industries that would benefit most include ones that produce materials for the recovering U.S. housing sector, as well as the automotive industry, capital spending, and industrial production.

Growth in the U.S. would also push commodity prices higher and keep the Canadian dollar elevated, Chandler said.

"We see Canada as a bit of a canary in the coal mine for developed fixed income markets, and that means we think it'll be important to watch, even if you're not directly involved in the Canadian market," he added.


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