Bank of Montreal Economist Cuts Bank of Canada Interest Rate Forecast

The Bank of Montreal reduced its forecast for how fast Canada’s central bank will raise its key interest rate, citing Europe’s debt crisis and evidence of sluggish U.S. economic growth.

The Bank of Canada will raise its main rate to 1 percent by the end of the year from today’s 0.5 percent, said economist Michael Gregory, compared with a June 3 prediction of 1.25 percent. The benchmark rate will be 2.5 percent at the end of 2011, he added, versus the prior forecast of 3.25 percent.

Governor Mark Carney raised the policy rate June 1 from a record low and said future moves would depend on the pace of growth in Canada weighed against signs of an uneven global recovery and the potential effects of some European government deficits. The U.S. this month reported a smaller-than-expected gain in payroll employment and a larger-than-expected drop in factory orders.

“There will be a lot of uncertainty about whether the U.S. economy will slow and augment the risks that are already out there in Europe,” Gregory said in a telephone interview from Toronto. “We just wanted our forecast to reflect a greater degree of caution.”

The next rate announcement is July 20, and Gregory still predicts an increase at that meeting to 0.75 percent.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

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