U.S. housing starts slumped in March, supporting the view that the Federal Reserve can stand pat on interest rates.

RBC Financial Group’s economists say that U.S. housing markets cooled at a faster than expected pace in March as housing starts plunged by 7.8% over the previous month to about 1.65 million units. Markets had been expecting a retrenchment to about 1.70 million units.

RBC says that construction volumes are still strong, but, “this weakening is the start of what we expect to be further moderation in U.S. housing markets over the course of 2002-2003. Starts over the winter months were biased upward by abnormally warm weather and very low mortgage rates and these effects are now lifting. Rising mortgage rates will further crimp housing market activity over 2002-2003.”

BMO Nesbitt Burns says, “Nonetheless, the housing sector remains in good shape, with starts still in-line with the 12-month average.”

It concludes, “No one is going to get excited about this U.S. housing report unless, or until, starts decline in the key spring building season. The recent drop in long-term interest rates and hints that the Federal Reserve is in no hurry to tighten probably mean housing is less threatened during the spring and summer months, despite the fact that the activity level remains very high.”