As anticipated, the Bank of Canada maintained its target rate at 1 per cent this morning. On inflation, the Bank noted that it " expects the inflation rate to decline as a result of reduced pressures from food and energy prices and ongoing excess supply in the economy." The Bank expects a weaker external outlook and the ongoing sovereign debt crisis in Europe to dampen Canadian economic growth in the near future. 

Although markets have been pricing in a rate cut of late, our baseline view is that the Bank of Canada is unlikely to move on interest rates absent a serious escalation of the Euro-zone crisis.

Even without an escalation of the Euro-crisis, 2012 will be a challenging year in the global economy. The uncertainty and austerity imposed in Europe will almost certainly cause much of the EU to fall into a recession. Moreover the fiscal drag from fading stimulus and further cuts to government spending will subtract from growth in the United States. Given these challenges, our current forecast is for the Bank of Canada to stay on the sidelines for much of 2012 with the possibility of a 25 basis point rate increase coming toward the end of next year.

Canadian GDP Growth - Q3 - November 30, 2011

Canadian economic growth rebounded strongly in the third quarter of 2011 following a slight contraction in Q2.  Real GDP data released this morning showed that the economy grew a robust 3.5 per cent last quarter, propelled higher by surging exports. However, domestic demand moderated as consumers and businesses reigned in spending. 

Our forecast is for economic growth to slow in the fourth quarter and through much of 2012, likely to an average rate of between 1.5 and 2.5 per cent. Slow growth in Canada and uncertainty in the global economy will keep inflation steady and allow the Bank of Canada to hold off on rate hikes through much of next year, with the potential for moderate tightening near the end of 2012.