Rate hikes on hold?
In 2004, the Bank of Canada pursued a series of proactive interest rate hikes to snuff out inflationary pressures. As the year progressed, the Canadian dollar soared to heights not seen since the early 1990s.
RBC Royal Bank believes the Bank of Canada's proactive stance, and the high dollar, will keep further rate hikes on hold until Q4 of 2005. Core inflation should remain well within the Bank of Canada's 1% to 3% target.
Much of the dollar's rise in 2004 was based on the U.S. dollar's weakness against many currencies. In 2005, the Canadian dollar is expected to hover around 80 cents U.S.
Why? First, commodity prices will likely remain elevated but rise at a more moderate level given a slowing world economy. Second, U.S. interest rates are expected to rise more quickly than in Canada, thus eliminating the interest rate spread between the two countries and hence some impetus for a rising exchange rate.
Bank Rate
Canadian Interest and Exchange Rate Forecast
These figures are based on the calendar year. The actual rates are based on Bank of Canada rates. The forecasts are from RBC Royal Bank.
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