Bank of Canada lowers growth forecast, hints at interest rate hikes

(April 23, 2003) The Bank of Canada today lowered its forecast for economic growth and said it would likely have to raise interest rates later in the year to keep inflation in check. Governor David Dodge also said that the SARS outbreak in Toronto could impact the Canadian economy, but added it’s impossible to say by how much.

In its quarterly monetary report, the central bank predicted growth of 2.5% this year, down from a projection of 3% in January. It also said that returning inflation to the target rate of 2% would require further increases in interest rates. The bank has raised its key overnight lending rate by 25 basis points twice this year, to 3.25%.

Dodge said that some of the geopolitical uncertainty that has figured prominently over the last six months has begun to lift, a reference to the war in Iraq. But he added that some uncertainty remains, such as concerns about the possible economic impact of SARS.

“Obviously the impact will come most importantly and certainly first in the areas related to hospitality services, to tourism and to travel,” Dodge said, adding that the Greater Toronto Area accounts for about one-fifth of total economic activity in Canada. “So it will have some impact but it is just far too early to say how much.”

Earlier today, the World Health Organization warned travellers to avoid Toronto because of SARS. Toronto health officials have called the travel warning an overreaction that could seriously damage the city’s reputation.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca