Economists at Toronto-Dominion Bank say they now expect the Bank of Canada to leave interest rates untouched until early next year.

In a research note, TD says that it believes that further interest rate hikes are off the table for now, and that, in particular, “a pause is by far the most likely outcome for the October 19th decision.”

TD gives three main reasons for its prediction: global conditions have become increasingly uncertain, and not a little gloomy; Canadian economic data has consistently disappointed, and suggests future subpar growth; and, communications from the Bank of Canada have been quite dovish lately.

“In the absence of a rate change, the Bank of Canada’s statement will be important, and should exude softness,” TD says. “Current economic conditions should be described in more negative terms, with global growth sputtering and recent Canadian growth disappointing expectations.”

TD expects the central bank to downgrade both its domestic and international forecasts, and predicts that the 2010 forecast will probably drop from 3.5% to about 3.0%. For 2011, the BoC has been forecasting a 2.9% gain, which TD expects to see downgraded, too.

“If it arrives around 2.5%, the collective downgrades will result in an output gap that remains far from closed at the end of 2011, and instead the BoC may project a return to full capacity around mid-2012, or even later,” TD says. “Given the substantial shift, we highlight the risk that the inflation forecast might be pitched downwards, too, with a later return to a sustainable 2% level.”

“Our medium term outlook remains for a Bank of Canada on hold through the end of the year and into early 2011. We then imagine a slow but steady pace of tightening that results in a 2.00% overnight rate at the end of 2011, and a 3.00% rate at the end of 2012,” TD concludes.