After yesterday’s rate cuts on both sides of the border, economists are busily recalibrating their interest rate forecasts downward.

National Bank Financial says that it still sees the US Federal Reserve Board taking rates down to 2.5% this year. “In our view, the question now is how much stimulus will be needed to get the economy back on its saddle and calm down market anxiety. On that front, we can only hope Washington’s proposed fiscal package will be enacted quickly,” it says

However, BMO Capital Markets is looking for the Fed to cut rates all the way from 3.5% today to 2% by the middle of this year. “Once the Fed stops easing, yields should begin drifting up, although meaningful increases will be reserved until the Fed starts signaling its intention to resume normalizing policy rates (not until the spring of 2009),” it says.

The Bank of Canada will likely continue to follow the Fed’s easing lead, BMO adds. “After cutting rates 25 bps this week, we look for quarter-point cuts to continue (and probably one 50 pointer) through mid-year, as the Bank attempts to mitigate the downside risks arising from a US recession, along with the lingering legacies of a strong loonie and tighter credit conditions,” it says.

RBC Capital Markets also sees rates going to 2% in the US, with three 50 basis point rate cuts forecast at each of the next three meetings.

In Canada, RBC expects the Bank will become more aggressive in lowering the rates. “We are forecasting 100 basis point of rate cuts by the end of the second quarter, bringing the overnight rate to 3%, with a 50 basis-point cut likely on March 4. This is a change from our previous forecast for the overnight rate to bottom at 3.5%.”