David Dodge, Governor of the Bank of Canada, dropped a few hints Wedneday that the next move for Canadian rates may well be down.

Speaking to the Metropolitan Halifax Chamber of Commerce, Dodge highlighted downside risks to demand, including continuing weakness in the U.S. and global economies, and concerns about the economic impact of SARS and BSE. “These developments likely mean a very weak second quarter and point to some continuing softness in the Canadian economy in the third quarter,” he said.

He noted that U.S. domestic demand has not been recovering as quickly as expected. “Expectations as to when the U.S. recovery will occur have been pushed back until late this year when confidence levels should improve, and when the impact of very expansionary monetary and fiscal policies should begin to be fully felt.”

“Looking forward, it remains our view that growth in Canada’s economy will be underpinned by the strength of domestic demand and a rebound in the U.S. economy towards the end of 2003 and through 2004,” Dodge said. “However, the appreciation of the Canadian dollar against the U.S. dollar, which is an outcome of various influences at work in both the Canadian and global economies, will be a factor influencing aggregate demand.”

Dodge said that the magnitude and speed of the Canadian dollar’s rise has been greater than anyone had anticipated and “will have a dampening influence on aggregate demand later this year and next”

He also noted that the central obstacle to rate cuts, inflation, is moderating faster than the Bank expected. “It now appears that both core and total CPI inflation will return to the 2% target somewhat earlier than the Bank had anticipated in April. This is, in part, because of some near-term softness in demand. Also, the appreciation of the Canadian dollar will somewhat dampen the rise in total CPI, although it is not expected to have as large a direct effect on core CPI.”