Scotia Economics says that the latest comments from the Bank of Canada indicate that rates may remain at rock bottom levels into 2016.
In a new report, Scotia says that the central bank “probably now envisages spare capacity remaining into 2016.” And, it says that the bank could push out its forecast for returning to the 2% inflation target in its next statement and the monetary policy report, which will be issued on October 23.
Scotia says that it bases this conclusion on updated guidance from the bank, in a speech delived by senior deputy governor Tiff Macklem earlier this week. The BoC previously expected a return to the 2% inflation target by mid-2015. However, Macklem indicated that the central bank has lowered its growth forecast. (See Investment Executive, Economy not growing as quickly as thought, says BoC deputy governor, October 1, 2013.)
“A clear risk to our view concerns whether the BoC revises its 2014-15 growth forecasts higher. We did not see much optimism reflected in Macklem’s speech to justify this risk and the BoC would face a high bar in explaining why it keeps pushing out optimism,” Scotia says.
Scotia also says that it continues to believe that very easy money will be required even as spare capacity shuts. “That’s because we don’t see the economy slipping into material excess aggregate demand into 2016. Highly stimulative monetary policy may therefore be required even at a resting equilibrium of no spare capacity,” Scotia says.
Indeed, Scotia expects the BoC to leave rates on hold throughout all of 2013-2015, “with the BoC lagging the Federal Reserve either in timing and/or magnitude under current Fed guidance,” it says.
“This would be tantamount to coaxing markets to engineer a rate cut, without meeting the very high bar at the BoC for cutting its policy rate outright,” it adds.