Craig Wright’s team of economists at the Royal Bank of Canada just put out their latest forecast of the behaviour of central bank governors here and in the U.S. Their forecast? Both central banks will be aggressively lowering rates to fight economic uncertainty.
In the U.S., RBC had earlier forecasted a cut of 50 basis points over the next three meetings of the U.S. Federal Reserve Board. RBC now predicts that the Fed will take the overnight rate down to 75 basis points over the next three meetings, from 4.50% to 3.75%
In Canada, the easing won’t be as sharp, RBC says, but rates will drop 50 basis points on the two fixed action dates in January and March. That would take the overnight rate here down to 4.0 %.
Here’s an excerpt from the forecast:
While an increasingly large drag from the trade sector and moderating inflation pressures are likely to see the Bank shift into rate cut mode, the strength in the domestic economy in the third quarter is likely to delay any downward adjustments to rates by the Bank until early 2008.
The combination of slower US growth, the elevated Canadian dollar, volatility in Canadian financial markets and moderating inflation rates will likely see the Bank cut the overnight rate in 25 basis point increments at both the January and March fixed action dates. The near-term risk to our view is that the Bank moves sooner than we forecast and cuts the overnight rate at the December 4 rate setting. However, our expectation that this week’s report on third quarter growth will show that domestic demand grew at a robust 4.5% annualized pace, combined with the very firm tone in the labour market data in recent months, means we lean towards the Bank holding the policy rate at 4.5% at its next meeting.
Going into 2008, we expect the Bank to lower the overnight rate to offset the sizable increase in the restraint coming from the trade sector on the pace of economic growth. In the third quarter, net exports are expected to trim the quarterly growth rate by about 3 percentage points and our modeling of the trade sector, based on the current level of the currency and weakening in US demand, points to another substantial drag in the fourth quarter. With some slowing in domestic demand growth, the pace of GDP is expected to slow further in the final quarter of 2007. This, along with moderating core inflation, will likely lead the Bank to an easier policy stance.