The new forecast pushes the expected time frame for the Bank of Canada to raise its benchmark interest rates back from previous expectations of the second half of 2012.
As recently as this spring, economists had been speculating about a rate hike before the end of 2011, but the market turmoil of the past few months sparked by the eurozone debt crisis has changed all that.
“As global economic risks have escalated, casting commodity prices and the Canadian dollar much weaker, the Bank of Canada’s diminishing tightening bias has probably diminished further,” Michael Gregory, senior economist with BMO Capital Markets, said in a report.
Mr. Gregory noted that the market has now actually swung all the way into cut territory pricing in two 25-basis point rate cuts by April 2012. But with inflation slightly below target, a weak loonie and credit markets still functioning, movement in either direction is unlikely.
“The policy easing bar remains high. Short of signs of imminent recession, the bank should remain on hold,” he said.
Mr. Gregory also forecasts the loonie to tumble further, down to US93¢ before recovering to parity by 2013.
Source: Eric Lam, National Post