Economists say that today’s Monetary Policy Report leaves the door open to possible cuts to interest rates cuts, and suggests that rates will remain low for some time.

Bank of Montreal notes that the Bank’s growth outlook is little changed, but its inflation forecasts have slipped a bit. BMO says that the Bank continues to expect core inflation to return to the 2% target by the middle of 2005 as economic slack is taken up. “In our view, it is not readily apparent how inflation will return to the target by this period, as price pressures should remain benign as long as some slack exists,” it says.

And, BMO notes that the report tended to highlight downside risks to the forecast for growth and inflation. “The Report is consistent with our view that the central bank will stay on the sidelines until the middle of next year, before raising rates gradually back to more neutral levels. However, should any of the downside risks cited in the Report come true, the Bank would likely cut rates.”

CIBC World Markets says that after opting to leave interest rates unchanged, the Bank of Canada has to argue that there are few bumps in the economic road ahead. “But there’s nothing in this report that rules out another interest rate cut come December.”

“Above all else, this is an inflation-obsessed central bank, and its CPI outlook is decidedly benign,” CIBC says. “We share their view that core inflation is set to drop to just above 1% early next year, and headline CPI will be even softer when we reach the one-year anniversary of the Iraq-war spike in crude oil. The report lays out the case for that dovish outlook quite well, noting downward pressures on inflation from existing economic slack and an appreciating currency.” CIBC suggests that the Bank didn’t cut rates in October because it is saving its weapons to fight future weakness.

TD Bank takes a more sanguine view of the report, saying that the main conclusion that can be drawn from it “is that further interest-rate cuts do not appear to be showing up anywhere on the central bank;s radar screen”. It notes that the Bank is “clearly looking at less of a drag from the currency’s appreciation — which will continue to be felt well into 2004– than historical relationships would suggest, and correspondingly, appears noticeably more optimistic on the economy than many other forecasters, including ourselves.”

CIBC agrees that the Bank of Canada recognizes the upcoming drag from the Canadian dollar’s gains, “but now seems to be at odds over how much weight that should be given in its growth and inflation outlook.” It says, “Look for a drop in core inflation and a climb in the Canadian dollar to prompt a quarter point interest rate cut in December.”