The Bank of Canada will cut interest rates this week, predicts TD Bank, but the move will likely be a very close call after some stronger-than-expected economic data.

This week’s reports of third-quarter economic growth in the U.S. and Canada painted a rosy picture, TD says. U.S. real GDP advanced by an upwardly revised 4.9% annualized pace – a full percentage point faster than previously reported. In Canada, the initial report that the economy expanded by 2.9% in Q3 was well above financial market expectations by a wide margin.

“However, these favourable outcomes do not alter our assessment that significantly weaker conditions are in store, which is likely to lead to an easing in monetary policy,” TD says.

“To understand why, we can start with the recent deterioration in credit conditions. Spreads between private-sector and benchmark government rates have widened once again, and this is likely to take a toll on financing and credit availability.

The latest widening in spreads has been partly in response to earnings writedowns by many major financial institutions, but it has also been a market reaction to growing pessimism about the economic outlook. And, on this front, there are some dark storm clouds,” it adds.

As a result, TD predicts that the Federal Reserve is likely to deliver 25 basis-point cuts at each of the next three FOMC meetings.

Here at home, TD foresees the Bank of Canada easing monetary policy, but says that the key question is the timing.

“Today’s strong GDP numbers make the Dec. 4 announcement a very close call, but since the Bank is forward looking and knows that changes in monetary policy are only felt with a lag of 12-18 months, the odds still favour a quarter-point rate reduction next week,” it concludes.

“If the Bank does not act next week, there is a good chance that it will acknowledge that the downside risks have increased. By doing so, the bank would keep financial market expectations for future rate cuts alive and limit any rebound in the Canadian dollar that would come from an unwinding of the 50 basis points of easing that is currently priced into markets for 2008,” it adds.