Rising oil prices will hold growth in the Canadian economy below 3% both this year and next according to the latest Economic Forecast by CIBC World Markets.

CIBC WM forecasts Canadian gross domestic product to grow by 2.6 in 2005 and by 2.7% in 2006.

The report notes that while rising oil prices are gradually braking global economic growth, it will take even higher prices to align future demand with dwindling supply growth.

CIBC WM expects little over 1% increase in global crude supply in 2006, resulting in oil prices averaging $61 per barrel next year and $55 per barrel this year.

“The expected rise in oil prices to $61 per barrel next year will likely be a preclude to an even tighter supply picture emerging over the balance of the decade,” according to the Forecast’s author, Jeff Rubin, CIBC World Markets’ chief economist.

CIBC WM says the Bank of Canada is expected to abandon its tightening bias as the drag from high-energy prices holds economic growth below potential. It does not expect the Bank of Canada to raise its interest rate setting, currently at 2.5% over the balance of this year or next.

Rubin notes “modest economic growth should not only keep the Bank of Canada from raising interest rates, but also pave the way for a monetary policy ease through a falling exchange rate.”

With the US Federal Reserve Board still poised to raise interest rates in the short-run, the Bank of Canada’s overnight target rate will soon be as much as a full percentage point below U.S. rates. CIBC WM says lower interest rates in Canada than in the U.S. will push the Canadian dollar down to around 75 cents by this time next year.

Despite rising energy prices, the forecast does not expect to see a sustained rise in inflation, with the consumer price index inflation expected to hover near 2% over the next 18 months.

Other than the energy sector, the pace of economic activity should remain moderate to subdued, with the national unemployment rate likely to remain around 7%.