RBC Financial says it now expects the Bank of Canada to cut interest rates rates at its next meeting.

“Over the past week, there have been rapid developments in terms of expected directions in Canadian monetary policy that have caused us to change our interest rate outlook. We now expect the Bank of Canada to cut interest rates by a further quarter point at its meeting on March 2nd,” it reports.

After that cut, RBC believes that rates should be on hold for the rest of the year. “Regardless, no matter how you slice it, short-term interest rates are low and will remain low for the rest of the year with only a minor degree of tinkering around the margin,” it says.

“Most of this change in our rate outlook has less to do with any expectations for a deteriorating picture of economic growth over the rest of this year and into next, and more to do with the current emphasis placed upon some weak short-term indicators by the Bank of Canada,” RBC says. “Trade numbers have disappointed in nominal if not real terms, manufacturing shipments slipped last month due to the auto sector, and vehicle sales have slid for five consecutive months. Other indicators such as strong job growth and indications of strength in business investment such as machinery and equipment imports from the U.S. provide mixed signals on the performance of the overall economy.”

In the U.S., RBC still expects the Federal Reserve to leave rates unchanged next Tuesday. “The fed funds rate is still expected to double by year end from its present level of one percent, and then double again next year to about the 4% mark,” it says.”

“Our view is that U.S. growth this year will come close to the 5% mark, before settling down to a still healthy 3.5% pace next year. That should fairly quickly tilt risks towards inflationary concerns building gradually over the next two years, thereby prompting the Federal Reserve to start withdrawing monetary stimulus particularly given the highly stimulative short-term influences of deficit-financed spending,” it concludes.

http://www.rbc.com/economics/market/daily_e.html