Though the Canadian dollar has weakened relative to the US dollar since the beginning of the year, its past strengthening continues to weigh on growth. Real Gross Domestic Product (GDP) growth was only 1.7% at an annual rate in the fourth quarter of 2004, due primarily to a sharp decline in net exports. Growth will remain fairly subdued, 2.8% this year and 3.2% next year. As a consequence, the Bank of Canada (BoC) is now expected to be on hold at least until the third quarter of this year. Given this outlook, the yield on the 10-year government bond is projected to rise to 4.9% by year-end.
Spending is up and taxes are down in the 2005 federal budget. Inflation is falling. With inflation so tame and growth less than robust, the BoC will remain on hold.
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