Financial markets can forget about interest rate cuts this year, say TD Bank economists, in a research note.

TD says that rate cuts are not going to happen. “The Bank of Canada’s January Monetary Policy Report Update put the final nail in the coffin for our call that the Bank of Canada will be cutting interest rates this year. And, similarly, the likelihood of any easing from the Fed is not looking very good either,” it says.

“On this side of the border, the story is not really about economic growth – the Canadian economy has been struggling, and the final quarter of 2006 in particular is likely to come in very weak. It’s all about Canada’s dismal productivity performance and the fact that the Bank of Canada still estimates – and justifiably so to a large extent – that the Canadian economy is operating at its capacity limits,” it says. “This is key because it does determine how the Bank might view any further economic weakness.”

“But in the U.S., it really is about growth. The U.S. economy is performing better than we were expecting,” TD says. “Most notably, the correction in the housing market appears well-contained, and does not appear to be holding down consumer spending. Although lower oil prices are part of the story, job growth has also surprised on the upside, and that is good news for consumers.”

“All told, it now looks like both central banks are going to be on hold for some time – and correspondingly we are no longer looking for any action on policy rates in 2007. In turn, that makes for a rather benign outlook for North American fixed-income and currency markets,” it adds.