Bank of Canada may not hike interest rates until 2016
from The Globe and Mail
Bank of Nova Scotia economists are now raising the possibility of no move in the Bank of Canada’s benchmark interest rate until 2016. Other observers have speculated on late next year or early 2015 for the first rate hike by the central bank.
But Scotiabank’s Derek Holt, Mary Webb and Dov Zigler say the Bank of Canada is now signaling a hold of more than two years, citing signs in a recent speech by senior deputy governor Tiff Macklem, among other things.
Earlier this week, Mr. Macklem painted a less optimistic picture than painted a couple of weeks earlier by Governor Stephen Poloz. The Bank of Canada’s benchmark overnight rate now stands at just 1 per cent.
“The Bank of Canada probably now envisages spare capacity remaining into 2016,” the Scotiabank economists said, adding the central bank now projects hitting its 2 per cent target for annual inflation in mid 2015.
They believe the Bank of Canada may change that forecast, to an even later date, when it meets later this month and also issues its monetary report.
“Against the conventional thinking that the Bank of Canada would want to hike (rates) before spare capacity closes, we continue to think that very easy money will be required even as spare capacity shuts,” the economists said.
“That’s because we don’t see the economy slipping into material excess aggregate demand into 2016,” they added in a research note.
“Highly stimulative monetary policy may therefore be required even at a resting equilibrium of no spare capacity. An added constraint in this regard is that while BoC has exercised modest policy independence from the Federal Reserve in the past and with a mixed track record, we continue to view the central bank as being toward the limits of independence from Fed policy. The Fed has vowed to hold its benchmark rate at effectively zero until unemployment eases to at least 6.5 per cent.
The Scotiabank economists have been further out than others in the belief that Bank of Canada won’t move until the third quarter of 2015, with the possibility of holding steady until, “well into 2016.”