If there is a move in interest rates this year, the U.S. Federal Reserve Board is more likely to cut rates, whereas the Bank of Canada is more likely to have to raise them, say TD Bank economists.

“We continue to believe that the most likely outcome on the monetary policy front is that both central banks — the Fed and the Bank of Canada — will keep their policy rates unchanged through the end of 2007,” it says. “But that does not mean that the risks are symmetrically distributed around our base case forecast.”

“In our view, the risks are not evolving symmetrically between Canada and the U.S. Despite all the hawkish talk from Fed officials, we believe that the odds in the U.S. are tilted more heavily towards a rate cut. In Canada, it’s quite the opposite. The inflation risks are clearly mounting on this side of the border. And, that implies that the odds are more heavily tilted in the other direction — towards rate hikes,” TD says.

“In sum, we may still be looking at unchanged rates from here to the end of the year. But it is the risks that are going to move the markets. And, those risks are clearly starting to diverge. If that trend continues, it could spell further rate convergence down the road,” TD concludes.