TORONTO - A big Canadian bank predicts the slumping economy will put interest rates on hold, or moving lower, until at least until 2013.
In an interest rate outlook released Tuesday, the Bank of Montreal said it does not expect interest rates to rise again until the early part of 2013.
That's about six months later than earlier forecasts that rates would stay flat until the fall of 2012 as the Bank of Canada tries to boost the sagging economy.
In the bank's report, BMO Capital Markets senior economist Michael Gregory said the weaker global economy has squeezed commodities, the Canadian dollar and undermined growth in Canada.
That has kept inflation in check and made it more likely the Bank of Canada will hold the line on rates.
In fact, Gregory said, there is a good chance the central bank will cut rates over the next six months -- by close to half a point.
That's good news for homeowners with variable-rate mortgages and consumers financing loans and lines of credit tied to the prime rate. However, even rock-bottom rates may not be enough to spur consumers to spend if job loss fears grow and incomes sag.
In the United States, the Federal Reserve Board has already said it will keep rates low for another two years or so in the hopes of injecting consumer confidence back into the troubled economy.
"As global economic risks have escalated, casting commodity prices and the Canadian dollar much weaker, the Bank of Canada's diminishing tightening bias has probably diminished further," said Gregory.
"We now judge that the resumption of rate hikes will be an early-2013 affair."
The report noted that with recession risks building on both sides of the Canada-U.S. border, and the next six months being particularly critical, the odds of Bank of Canada cutting rates are also growing.
"The market is currently pricing in a little less than two (quarter point) rate cuts by April 2012," Gregory said.
"However, with core CPI inflation not far below its two per cent target, the loonie, now more than six cents weaker than where the bank had assumed in its projections, and a continued well-functioning domestic bank credit creation process, we judge the policy easing bar remains high. Short of signs of imminent recession, the bank should remain on hold."
The BMO report also projected the loonie will settle at around 93 cents U.S. next year.
"During the second half of 2012, with global economic and commodity price prospects improving, the currency's fortunes should shift with a flight plan back to parity by January 2013."
