"North America's story is again darkening," says Avery Shenfeld in CIBC's Global Positioning Strategy report released Wednesday. "We were looking for a material second-half slowdown for the U.S. but as it turns out, it's already happened."

As a result of the dampened external growth outlook, Shenfeld has trimmed his call for rate hikes. He sees Canadian overnight rates going no higher than two per cent in 2011.

Earlier this month, the U.S. Federal Reserve released a more gloomy outlook for the economy, saying the recovery "has slowed in recent months."

The Fed also left benchmark overnight interest rates steady in a zero-to-0.25 per cent range and renewed its pledge to keep them there for an “extended period,” as widely expected.

The future points to a "further fiscal belt tightening in 2011 that will have to be softened, and accompanied by quantitative easing, if the U.S. is to stay out of recession in early 2011 and get back to potential growth by the end of that year,” Shenfeld says, adding rate hikes are not expected in the U.S. until 2012 “at the earliest.”

This led Shenfeld to conclude that while Canada is in much better economic shape — it leads the U.S., eurozone, U.K. and Japan in first-half growth and has a much rosier employment picture than the U.S. — it “cannot move all the way to normalized interest rates while the U.S. Federal Reserve is still on hold.”

After leaving rates at a record-low level of 0.25 per cent for more than a year, the Bank of Canada raised its key policy rate 25 basis points in June and then again in July on a strengthening economy. It now stands at 0.75 per cent.

However, the central bank said “considerable uncertainty” in the global economic outlook would force the bank to “carefully weigh” future rate decisions.

Shenfeld says he doubts the Bank of Canada “has been shocked enough to forestall a rate hike in September” but his forecast that Canadian growth in the second and third quarter will fall below the central bank’s outlook will likely warrant a rethinking in the October Monetary Policy Report and in the months to follow.

After posting annualized growth of 4.9 per cent in the final quarter of last year and 6.1 per cent in the first quarter of 2010, the Bank of Canada now expects the economy to expand by three per cent for the three-month period ended June 30 — down from its original forecast of 3.8 per cent — and by 2.8 per cent in the third quarter — revised from 3.5 per cent.