BNN.ca staff
2:02 PM, E.T. | September 6, 2011
Canadian, Economy

Investors expecting that the Bank of Canada will maintain its hawkish tone when it announces its interest policy on Wednesday will be disappointed, according to an economist at Goldman Sachs. The interest rate decision comes after recent reports showed the Canadian economy contracted in the second quarter.

"In terms of policy, at a minimum, the BoC will decide to keep rates on hold this meeting and this 'warning' language will be withdrawn," Andrew Tilton wrote in a note to clients on Tuesday. "A cut in the overnight rate target tomorrow is not out of the question, although we think the more likely outcome is simply for an 'easing bias' to the policy language."

Goldman -- going against consensus -- now expects the Bank of Canada to pursue a 50 basis point cut in the fourth quarter and hold its overnight rate target at 0.5 percent through 2012. And while the Bank of Canada has repeatedly warned Canadian consumers about their high debt levels, Goldman believes the bank is now willing to tolerate high consumer and housing debt in order to maintain economic growth.

Goldman also warns the strong economic rebound that many investors and economists predicted for the Canadian economy will not materialize.

"We are shaving our third-quarter growth forecast to 1.5 percent, from 2.25 percent previously," they write. "Together, this forecasts suggests a meaningful output gap stays in place through 2012."

The cut in Goldman's forecast comes after recent reports showed real gross domestic product fell at an annualized rate of 0.4 percent from the first quarter -- below forecasts of a 0.1-percent increase expected.

Mark Chandler, Head of Fixed Income, Currency and Research at RBC Capital Markets tells BNN that in the face of growing global economic uncertainty, the Bank of Canada should drop its hawkish tone.

“The first thing [The Bank of Canada can] say is 'we no longer have a tightening bias, we’ll do what’s necessary and we’ll keep a very close watch on how things are progressing. ' ”