There are no major economic releases in either Canada or the United States today, and RBC Financial Group economists say that the pause in the data flow will “allow markets to reflect on the surprising strength of the building recovery and its implications for monetary policy in the months ahead”.

“In the United States, the hit to growth prospects seen during the fall of last year widened an already-wide output gap, further easing capacity pressures. Thus, while few are terribly worried about the outlook to inflation, everyone agrees that an overnight rate of 1.75% is far too low to be sustainable in a rebounding growth environment,” it notes.

It expects the Fed to start taking back some of its easing, with the first 25 basis-point move likely in June, “with the risks increasingly tilted towards something earlier or larger. In total, we look for 125 basis points of tightening by the end of this year, which would translate into a Fed funds target of 3.00%, a level that would is more sustainable given our view on growth and inflation.”

Inflation expectations are very low in Canada too, RBC notes, but the central bank will have to start raising rates to account for the long lags in interest rate adjustments impacting the economy.

“The Bank of Canada is expected to kick off its tightening round around the mid-point of this year. We suspect the Bank of Canada will raise overnight rates by 25 basis points following their June 4 meeting, marking the first move in what is expected to be a lengthy series of interest rate increases (125 basis point in total for this year) as the central bank adjusts interest rates back to something that is sustainable.”