Merrill Lynch’s David Wolf made headlines today with an eye-catching prediction.  He thinks Canada’s key interest rate will plummet 1.25% in 2008.

Wolf blames weakening U.S. demand for our goods and subdued Canadian inflation.  He says quite bluntly, “It seems ridiculous not to expect a substantial slowing in Canadian growth ahead.”

Goldman Sachs backs up Wolf’s view about the U.S.  Goldman today warned that the United States is in, or approaching, a “mild” recession.  Wolf expects this recession to last 2-3 quarters.

(Many economists dispute that the U.S. is in recession however.) 

Either way, Canada has “only” followed the U.S. into recession 4 of the last 6 times so its not a foregone conclusion that we`ll suffer. 

We can’t forget oil either.  At $95 a barrel, oil exports are now a much bigger part of our economy, and a much bigger contributor to inflation.  What’s more, Benjamin Tal says Canada’s real GDP growth is now far less dependent on the U.S. than it once was.  In 2007, for example, Canadian exports to China rose 27%.

Last but not least, there’s our mighty housing market.  Most expect Canada’s housing sector to remain firm in 2008, and that could keep confidence up and equity cash outs coming.

Given all of this, many still think it’s possible that the Bank of Canada could hike rates later this year. 

But, will they end up higher than they are now? 

There`s just too much uncertainty to tell.