Rising financial risks spell trouble

The Bank of Canada is widely expected to hold the key policy interest rate at 1% on Tuesday. More importantly, we expect it to hold the policy rate at 1% throughout this year. This is in contrast to the market consensus view that predicts rate increases throughout 2011, ending the year at 1.75%. While the incoming data have been encouraging, we still believe the Bank is not confident enough to raise the policy rate for fear of jeopardising the fragile recovery, particularly given the risks from global financial markets, housing prices, and high household debt.