The Globe and Mail reports in its Friday, May 27, edition that the Bank of Canada is being overly optimistic in counting on an economic rebound that is unlikely to come, raising the risk policy-makers will be forced to cut rates before the end of the year, some market players warned on Thursday. A Reuters dispatch to The Globe reports that in holding rates steady on Wednesday, the BOC pointed to expectations for a return to solid growth in the United States and a rebound in third quarter Canadian growth.
However, structural change means Canada no longer gets as much benefit from U.S. demand that it once did, notes Capital Economic economist David Madani. He says a lack of business confidence and a flagging housing market point to a September rate cut.
He says: "The economy will be lucky to grow by 1 per cent this year. It is wishful thinking that the economy is going to rebound strongly."
Overnight index swaps imply just a 5-per-cent chance of a rate cut this year.
HSBC Bank Canada economist David Watt, however, says the BOC will have to cut rates before year-end because counting on the U.S., Canada's largest trading partner, to pull the economy out of the ditch no longer works as it once did.
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