Rate forecast a double-edged sword

by Justin da Rosa20 May 2015
Canadian economists have suggested that the Bank of Canada will look to increase rates sooner rather than later, with the Bank of America expecting a rate cut.

"As the Fed hikes, the spillover effect of higher long-term rates in Canada will likely tighten financial conditions, reducing the need for any BoC policy tightening," Emanuella Enenajor, a Bank of America economist, and Ian Gordon, a foreign exchange strategist, said in a new report titled Handcuffed by the Fed.

"Even as the Fed begins a gradual rate hike cycle this year, we think the BoC will remain accommodative, and will likely ease by another 25 basis points to 0.5 per cent if growth disappoints, as we expect."

 A number of Canadian economists, however, have a differing opinion.

According to the National Post, Silvana Dimino, an economist at JP Morgan Chase & Co., believes the Bank of Canada will hike its key interest rate in the middle of next year, despite previous forecasts that the Central Bank will wait until the end of 2016.

“He recognizes there’s going to be some weakness in the Canadian economy, but he’s saying it’s going to be front loaded,” Dimino told the Post.

“If things go as they’re saying, and the output gap does close around the end of 2016, it seems reasonable they would start hiking before that.”

Poloz, of course, surprised the country with a 25 basis point rate cut in January.

The rate cut was part of the government’s “economic easing” and was expected to help kick-start the economy as it attempts to rebound from low inflation levels.

“We anticipate a partial rebound in growth in the second quarter, and a move to above-trend growth thereafter, for annual growth of 1.9 per cent this year,” said Poloz in late April.

“This projected growth profile gets us back on track to absorb our excess capacity around the end of 2016, at which time inflation will settle sustainably at 2 per cent.

“We see the risks around this projection as roughly balanced, but they will be reassessed continuously as new data become available.”

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