CIBC cuts rate hike forecast

The Bank of Canada may have no choice but to put interest rate hikes on hold after September, states a CIBC World Markets Inc report.

This would be all due to continuing weakness of the U.S. economy as key indicators are pointing to growth that will be slower than anticipated by monetary policy makers.

“North America’s story is again darkening,” says CIBC’s Chief Economist Avery Shenfeld in the latest Global Positioning Strategy report. “We were looking for a material second-half slowdown for the U.S. but as it turns out, it’s already happened. Forget about any rates hikes from the U.S. Federal Reserve until sometime in 2012 at the earliest.”

Although Canada is still leading the recovery charge, it “cannot move all the way to normalized interest rates while the U.S. Federal Reserve is still on hold,” says Shenfeld.

Shenfeld doubts that the Bank of Canada “has been shocked enough to forestall a rate hike in September” but his forecast that Canadian growth in Q2 and Q3 will fall below the BoC’s outlook will likely warrant a rethinking in the October Monetary Policy Report and in the months to follow.

As a result of the dampened external growth outlook, Shenfeld has trimmed his call for rate hikes. He sees Canadian overnight rates going no higher than 2% next year as the U.S. Federal Reserve stays on hold.