RBC thinks that Bank of Canada to ease rates to 2.75%

Posted on Mark Argentino
14.05.2008
(No Ratings Yet)

Loading ...

RBC thinks that Bank of Canada to ease rates further

We also made a modest revision to our Bank of Canada call in mid-March with the Bank expected to lower the overnight rate to 2.75% rather than the 3% in our previous forecast.

With the U.S. economy in the midst of an economic downturn, Canada’s growth prospects have been dampened and we forecast that the economy will grow at a tepid 1.6% this year with first-half growth averaging a modest 1%. Previously, we projected 2008 real growth of 1.7%. Financial conditions in Canada are mirroring those in other global markets with the cost of capital rising. Slumping U.S. demand for Canadian exports will weigh heavily on the pace of expansion and we expect that net exports will subtract about 3-1/2 percentage points from the 2008 economic growth rate.

The Bank of Canada acknowledged the downside risks to the economic outlook coming from the slowing U.S. economy and tightening in credit conditions when they upped the pace of rate cuts to 50 basis points on March 4 from 25 basis points at the December and January fixed action dates.

In March, policymakers reiterated that “further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to achieve the 2 per cent inflation target over the medium term”, pointing to further easing in monetary policy.

Our forecast that Canada’s economy will grow at a sub-potential pace in the first six months of 2008 is consistent with both the core and all-items inflation rates holding below the 2% mid-point of the Bank’s inflation target range for most of the year.

Market interest rate forecasts have been tuned lower as well, with rates now expected to hold around current levels for the first half of the year and to gradually increase in the final six months. Our year-end forecast for the two-year Canada rate is 2.8%, down from our earlier projection of 3.25%. With the 10-year yield forecast at 3.75%, down from 4%. Canada’s two-year/10-year yield curve will remain steep and Canada-U.S. interest rate spreads are expected to narrow modestly this year.