The Bank of Canada will stand pat tomorrow, say the economists at BMO. “The Bank need not raise rates now as late-year auto and house sales have
softened a bit, although 2002 will remain a record year for both sectors. And the November trade surplus was somewhat smaller than expected. With the U.S. economy on such a shaky footing, it would not be prudent for the Bank to raise rates now.”

Troubling developments in the U.S. economy have led economists to revise the consensus forecast for fourth quarter GDP from 1.1% to 0.5%, BMO notes. “While we think the final reading might not be quite that weak, clearly the incoming data have been disheartening.” For example, U.S. employment has been weak, consumer confidence is slumping, retail sales are down, and the trade deficit widened to a record level.

The U.S. Federal Reserve meets again Jan. 28 and 29. BMO expects them to shift from a neutral to an easing bias, suggesting that the risks are now weighted towards weakness.

“Crucial to the outlook remains the geopolitical uncertainty. The White House is quickly losing patience with the weapons inspection. A decision will be made at month-end. If Saddam refuses to leave, the U.S. is likely to commence the war in February.”