Julie Fortier , Financial PostPublished: Thursday, April 08, 2010

OTTAWA - With the Canadian economy doing surprisingly well over the past six months, many see higher interest rates from the Bank of Canada in the not so distant future, but according to a report released Thursday from CIBC's chief economist Avery Shenfeld, rates are likely to remain at a very low 2.5 per cent through to 2011 - not the seven to eight per cent forecast by some.

With the Canadian economy doing surprisingly well over the past six months, many see higher interest rates from the Bank of Canada in the not so distant future, but according to a report released Thursday from CIBC's chief economist Avery Shenfeld, rates are likely to remain at a very low 2.5 per cent through to 2011 - not the seven to eight per cent forecast by some.

In CIBC World Markets' latest Global Positioning Strategy report, Shenfeld lists several reasons for Bank of Canada Governor Mark Carney to keep interest rates subdued after July. He points out that the U.S. will probably have a more gradual approach to raising rates and if Canada gets too far ahead, that could send the Canadian dollar soaring.

"While factories are recovering in Canada alongside a global industrial revival, output remains nearly 20 per cent below the pre-recession peak, and wages are now substantially above those stateside without the productivity gains to match. There's only so much of a competitive challenge that non-resource exporters can take in short order," Shenfeld said.

He also pointed out that inflation is not expected to rise much further and stimulus spending is expected to be reigned in by governments - including Canada's - which will slow growth.

"If the U.S., the U.K., and Japan all move from huge stimulus to even modest restraint, Canada will feel it in our export prospects come 2011," Shenfeld pointed out.

Carney has promised to keep interest rates where they are at 0.25 per cent until the end of June. However, the latest reading of Canada's economic growth showed the core inflation rate at 2.1 per cent in February, far above the Bank of Canada's forecast of 1.6 per cent for the first quarter of the year. Many analysts believe the Bank of Canada will not wait until mid-2010 to raise rates and late last month, Royal Bank, TD Canada Trust and Laurentian Bank raised the rates they charge on certain fixed mortgages.

The C.D. Howe Institute suggests the Bank of Canada should raise its overnight rate by 1.75 per cent in the next year, likely lifting five-year mortgage rates to seven per cent, while other economists envision a five-year rate as high as 8.25 per cent in two years.