Bank of Canada interest rate unlikely to top 1% this year

John Shmuel July 23, 2010 – 11:16 am

Slower than expected economic growth in the U.S. is set to hamper Canadian exports, meaning the Bank of Canada’s interest rate is unlikely to rise beyond 1% by the end of the year, says a research note from Lombard Street Research.

The bank raised interest rates by 25 basis points earlier this week to 0.75%, in a move that was widely expected. The note, authored by analyst Michael Taylor, points out that the bank adopted a very cautious stance in regard to the Canadian economy going forward.

But Lombard Street Research said it expects lower growth than even the Bank of Canada’s revised figures. That leads Taylor to suggest that interest rate hikes from the bank are likely going to be hold on for much of next year.

"We would agree with a domestic slowdown, due to the expiry of temporary policy measures as well as the effects of higher interest rates on a highly indebted household sector. But the Bank has a rather optimistic view on US real GDP growth, which is expected to be around 3% both this year and next. Healthy growth in the US, combined with the recent fall in the Canadian dollar, has resulted in an increase in projected export growth for 2010 and 2011. Our view is that US growth will be below-trend over the next 18 months or so, restricting the scope for Canadian exports to grow strongly (three quarters of which go to the US)."

That leads Taylor to conclude that although a rate rise is likely at the next bank of Canada monetary policy meeting in September, he expects rates to be on hold thereafter for quite some time.

Read more: http://business.financialpost.com/2010/07/23/bank-of-canada-interest-rate-unlikely-to-top-1-this-year-report/?utm_source=twitterfeed&utm_medium=twitter#ixzz0uWj05DPa


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