Economists at National Bank Financial have altered their interest rate forecast in response to the latest communiqué from the Bank of Canada.

They now see the overnight rate rising to 1.5% by the end of the year, and then holding at that level through the third quarter of 2011, before rates resume their march higher, to 1.75% in the fourth quarter, and 2.25% in the first quarter of 2012.

“In light of the latest Bank of Canada press release, [Bank of Canada governor, Mark Carney] appears unlikely to pause its tightening campaign the way we had expected him to do,” NBF says in a research note. “The Bank of Canada was sending a message when it purposely left out of its press release many of the concerns it had expressed in July. Whether we like it or not, the BoC has maintained a tightening bias.”

“Since the current uncertain situation has not altered the Bank’s view on the Canadian inflation dynamics, we have to think that the policy rate will continue to be raised at a moderate pace at each of the next two interest-setting meetings,” NBF concludes.

“Unless more clouds gather on the horizon over the coming weeks, our forecast calling for a 1.5% overnight rate with a Canadian dollar at par against the [US dollar] by Q1 2011 will occur faster than what we had envisaged. Accordingly, we have updated our interest rate forecast to reflect the latest BoC’s interest rate hike and U.S bond market action,” it says.

IE