The long pause in policy interest rate just getting started

While it is widely expected that the Bank of Canada will keep its policy interest rate at 1.00% next week, we think the Bank's upcoming policy statement, due out on Tuesday, will be more downbeat about global economic growth prospects and the downside risks to growth in Canada. Officials are probably already regretting raising the possibility of an eventual withdrawal of policy stimulus in the last statement released only six weeks ago. We doubt that rate hike hint will be dropped from next week's statement, but the language could be softened. The sharp drop back in interest rate swaps and government bond yields indicate that financial markets are already far less convinced that rates are headed higher. We still forecast that the Bank of Canada will keep its policy interest rate at 1.00% this year and next.