We think the Bank of Canada is unlikely to raise interest rates from the current 1% anytime soon. Not only does the marginal improvement in current economic conditions partially reflect temporary factors, external downside risks to the outlook have not diminished. More importantly, the government is tightening down on bank lending rules to households in response to concerns about housing bubbles and household debt, while carrying out austerity measures that will effectively downsize government. All things considered, we think that interest rate cuts before year end or early next year cannot be completely ruled out. More generally, we anticipate a prolonged period of very low interest rates in Canada.
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