Hold on Bank of Canada's increasing rates...

(May 25, 2011 )

The Bank of Canada’s plan to raise interest rates and exit its stimulus program has been delayed to September due to renewed uncertainty about the fiscal crunch in Europe and its potential spillover effects into Canada, the team at RBC Economics said Tuesday.

Dawn Desjardins, assistant chief economist with RBC, expects the BoC to maintain its 1.00% rate until September, and has cut the forecast rate to 1.75% by the end of 2011 from 2.00%. RBC maintains expectations for the overnight rate to hit 2.5% in mid-2012, and forecast GDP growth of 3.2% in 2011 and 3.1% in 2012.

RBC had originally forecasted rate hikes in July, September, October and December this year. The bank now only expects hikes in September, October and December, Ms. Desjardins said in an e-mail.

“Combined with already-present downside risks to domestic growth in the second quarter, the Bank of Canada is likely to remain on the sidelines longer than we previously thought,” she said in a note to clients. “Complicating the outlook are global developments with the European sovereign debt crisis bringing fiscal and debt rating concerns to the forefront for investors. In the United States, economic surprises have been to the downside.”
So far, the Canadian economy looks to be holding steady with data suggesting 0.3% growth in March after a dip in February. Monthly growth figures put the economy on pace for 3.7% growth with risks on the upside.

Persistent strength in housing and growth in household credit, however, means the BoC cannot wait too long before taking action to avoid inflationary pressure.

“On balance we remain comfortable with our forecast of real GDP growth of 2.8% annualized in the second quarter although unlike in the first quarter where the risks are to the upside, the risks to our Q2 forecast are to the downside,” she said.