Katie Keir, with files from news wires / February 04, 2013
Scotiabank has changed its interest rate forecast, according to a recent economic report.
Previously the bank predicted rates would be on hold until Q1 2014, but now says it has decided to delay this by a full year.
It states, “[We] have long spoken about how the fat tail risks to our print forecast are skewed toward later rather than sooner, this is a pretty sizeable forecast change that merits delving into some of the key reasons.”
It then gives six reasons for the change. These include:
Fed actions will impact the Canadian dollar: The bank doesn’t “believe…the BoC will be able to significantly widen Canada-U.S. spreads…without imposing a more deleterious overshooting of the currency’s rate of exchange against the USD.”
Since it expects the Fed won’t raise rates until 2015, it finds the BoC will also stand pat until around the same time. Scotiabank adds, “There are limits to the independence of a central bank in a modestly sized economy that is heavily dependent upon its bilateral trading and capital markets relationship with the United States.”
The effects of mortgage-rule tightening: The report says, “[There’s] more evidence that cumulative regulatory tightening of lending conditions since 2008…is sharply cooling credit growth and housing markets… The cumulative, lagged impact of this rule tightening lessens the BoC’s focus upon perhaps…reinforc[ing] its effects by raising interest rates.”
Inflation could keep undershooting: The bank finds Canada is failing to meet the BoC’s inflation target, with headline CPI only hitting 0.8% year-over-year. The report adds, “The BoC might be expected to adopt an easing bias when falling so short of its inflation target.”
Uncertainty after Governor Mark Carney’s departure: The bank predicts policy continuity but says, “A risk is slanted toward a transition that could afford the opportunity for a new Governor to guide markets with his or her own bias in consultation with the Governing Council.”
Originally published on Advisor.ca
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