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Despite rising interest rates and oil prices, and a strengthening dollar, Canada's economy will continue to grow steadily over the next 18 months, according to Dr. Tim O'Neill, Executive Vice-President and Chief Economist for BMO Financial Group.

In an address to the Ottawa Economics Association today, Dr. O'Neill forecast 3.5 per cent growth in Canadian Gross Domestic Product from the fourth quarter of this year to the fourth quarter of 2005.

At the same time, Dr. O'Neill foresees interest rates will rise another 50 basis points by the end of this year, a further 75 basis points in 2005, and a full percentage point more by mid-2006. This would bring Canada's overnight rate to a near-term peak of 4.5 per cent - twice as high as today. He expects interest rates in the U.S. to reach similar levels by the Fall of 2006.

Dr. O'Neill said climbing oil prices would not alter the forecast significantly since any dampening effect on industrial production or exports will be largely offset by increased income growth in Canada's energy sector.

Inflation in Canada over the period, excluding energy costs, will continue to run below 2 per cent, he said. The Canadian unemployment rate will also remain fairly constant, near 7 per cent.

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