CIBC World Markets predicts that economic growth will slow in Canada to 2.9% next year, largely in response to a weakening economy in the United States.

A softer economic environment, coupled with continuing difficulties in the stock market, should see the Bank of Canada keep interest rates flat over the next year.

Stateside, CIBC World Markets expects that the Federal Reserve Board will cut interest rates by three quarters of a percentage point over the next six to eight months.

“The general direction for interest rates, particularly longer-term interest rates, will be down, not up,” said Jeff Rubin, chief economist at CIBC World Markets, in a news release. Rubin noted, that while the Bank of Canada did not match Federal Reserve Board rate cuts during past periods of market turbulence, neither did they move Canadian interest rates the other way.

Even with the Bank of Canada remaining on the sidelines for the foreseeable future, CIBC World Markets predicts that the short-term interest rate differential between Canada and the Untied States will almost double over the coming year, ballooning to nearly a full two percentage points between government treasury bill yields.

With that kind of yield advantage at its back, Rubin predicts that the Canadian dollar will appreciate steadily against the U.S. dollar over the next year and trade at US70¢ by the end of 2003 — a roughly 10% appreciation from today’s levels.

CIBC World Markets predicts that slowing economic growth will hold the national unemployment rate at close to its current 7.5% over the next year.

CPI inflation will level off and drop after bumping up over the coming months due to distortions caused in the wake of September 11th and falling oil prices last year.

With interest rates anchored by continuing concerns over capital market conditions, interest sensitive spending such as housing demand should remain relatively strong.