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In a news release by TD Bank today, TD expects that the Bank of Canada will not raise the overnight rate this year.

Today, TD Economics released its Quarterly Economic Forecast (QEF) publication, providing updated macroeconomic and financial forecasts for the global, U.S. and Canadian economies. The adjustments to the economic projections for Canada were minimal, but there was a major adjustment in the outlook for monetary policy and interest rates. TD Economics no longer expects the Bank of Canada to raise the overnight rate this year. Instead, the tightening of monetary policy is now anticipated to begin in early 2012, with the overnight rate climbing to only 2.00% by the middle of the year. While the rationale for this forecast is laid out in the QEF, it is worth explaining in greater detail.  Here are the highlights:

1. TD Economics no longer expects the Bank of Canada to raise interest rates this year.
2. The tightening of monetary policy is expected to begin in January 2012, and the overnight rate is only expected to increase to 2.00% next year. The Bank of Canada is then projected to raise the overnight to 3.00% in 2013.
3. This delayed and slow rebalancing of monetary policy reflects the risk-filled economic environment, which has reduced confidence in model-based
   economic projections that predict a closing of the output gap in mid-2012. It also reflects the possibility that there is more slack in the economy and that the ‘neutral’ level of interest rates may be lower than  previously thought.
4. Well anchored inflation expectations provide the Bank of Canada with additional flexibility to delay tightening policy until the economic uncertainty diminishes.
5. With the U.S. Federal Reserve on hold, the Bank of Canada is also constrained in raising interest rates, as widening interest rate spreads would boost the Canadian dollar that is already above parity.