January 21, 2005

Jeffrey Rubin: Forget about rising interest rates

Strong dollar will hurt economy, economist says

TORONTO

Forget about rising interest rates: the Bank of Canada is likely to reduce rates this year, the CIBC World Markets economics department said Wednesday.

“Not only is the Bank of Canada unlikely to match further interest rate hikes by the (U.S.) Federal Reserve Board, but it will soon be pushed into a rate cut this year in order to prevent an already overvalued Canadian dollar from moving higher and deep-sixing the country’s manufacturing and export sectors,” stated Jeffrey Rubin, chief economist at the CIBC investment banking unit.

CIBC World Markets predicts the Canadian economy will grow this year by 2.6 per cent — the second-most pessimistic outlook among the major banks, ahead of Scotiabank’s 2.5 per cent forecast.

Other banks are offering predictions in a narrow range up to 3.2 per cent, as the exchange rate suppresses exports.

The CIBC World Markets forecast says a further weakening of the American dollar could propel the loonie up to “a level that would threaten the Canadian economy with a major recession.”

However, it does not expect this to happen, predicting instead that higher American interest rates coupled with a rate cut in Canada will weaken the currency to a year-end level of about 77 cents (U.S.).

Economic growth of less than three per cent “will result in a modest backup in the jobless rate to 7.2 per cent,” it predicts, while inflation will remain under two per cent despite a further rise in energy prices.

“Energy markets are expected to get progressively tighter over the next two years as depletion limits supply growth while Asian economies increase oil demand,” according to CIBC World Markets.

“Oil prices are expected to average $50 (U.S.) per barrel this year and move up to $55 (U.S.) in 2006 as increasing depletion limits supply growth.”

The Canadian Press

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