High oil prices remain a wild card looming over both the Canadian and U.S. economies, says Tim O’Neill, chief economist, BMO Financial Group.

In the bank’s North American Outlook for August, O’Neill says that BMO has boosted its oil price forecast, in response to sustained high oil prices through the summer. In turn, this has caused it to lower its growth outlook for the U.S. economy. “Nevertheless, GDP is still expected to grow by close to 4% through mid-2005 before slowing to 3.25% in the latter half of next year,” O’Neill says.

In Canada, the benefit of high oil prices to Canada’s energy-producing sector “comes close to offsetting the negative hit to non-energy exports from slower growth in the U.S.,” he says. “Thus, the Canadian outlook remains relatively unchanged. GDP is expected to grow near potential (3.25%) through mid-2005, driven by investment spending and firm consumer demand, though held in check by the high value of the Canadian dollar.”

“The Bank of Canada is ready to begin tightening monetary policy, though the presence of considerable downside risks, such as the loonie’s strength and high oil prices, will keep the Bank cautious,” O’Neill predicts.

In the U.S., O’Neill comments, “Fed Chairman Greenspan’s optimism on the U.S. outlook remains unwavering. Thus, the Fed is expected to continue steadily raising rates, building on the June and August increases with three additional moves by the end of this year. This would take the fed funds rate from its current 1.50% to 2.25%.”