Bank's downside risks are being realised

It is almost a foregone conclusion that the Bank of Canada will hold its policy interest rate at 1% next week. More importantly, considering the slight contraction in second-quarter GDP and evidence of slowing global economic growth and rising financial risks, we think the Bank will strike a somewhat more dovish tone in its policy statement and press communications. Although the market has revised down its near-term GDP growth forecasts and pushed out its expectation for interest rate increases to the middle of next year, we believe the majority of economic forecasters are still too optimistic regarding the sustainability of Canada's economic performance. We see the Bank's policy interest rate remaining at 1% this year and next.