National Bank Financial has altered its interest rate forecasts, calling for cuts in the United States, and hikes in Canada to bring both to 4.75% by 2008.

“With overall world economic activity remaining quite strong it is not surprising to see inflationary pressures increasing in a number of overseas economies. In that context and given the resilience of the U.S. labour market, investors have lost patience and have been pricing out any early Fed easing,” NBF says.

“Since the woes of the housing market have not contaminated other parts of the economy yet, we are revising our interest rate forecast. However we still see the economy growing slightly below potential in 2008 as well as core CPI dropping below 2%. This should create an environment where the Fed will perceive that the inflation risks will have receded enough to accommodate a modest adjustment in monetary policy,” it says. “Thus, our base case scenario is for two rate cuts of 25 bps, bringing the fed funds rate to 4.75% during the first quarter of 2008.”

In the meantime, north of the border, for the first time since 2003, Canadian core inflation is above the mid-point of the central bank’s comfort zone and above core inflation in the U.S. “Taking notice of the Bank’s warning, we have revised our interest rate forecast. We now see the Bank of Canada raising rate at its next two meetings,” it says.