The Bank of Canada is likely to be all talk and no action on rate hikes, suggests BCA Research in a new report.
BCA points out that with the Canadian economy strongly outperforming the U.S. during the recovery, the Bank of Canada has clearly stated a hawkish bias, hinting that it is prepared to raise rates as the recovery gathers strength.
However, the firm says that it believes the central bank will be reluctant to deviate too much from the U.S. Federal Reserve Board’s policy stance, for fear that this could significantly boost the Canadian dollar. “With the Fed contemplating further quantitative easing, or at the very least, staying on hold for the foreseeable future, any rise in interest rates from the BoC would put additional upward pressure on the Canadian dollar,” BCA notes.
A much stronger dollar could, in turn, harm the economy, it suggests, which should keep the BoC from hiking rates for the time being. “Canadian policymakers are attuned to this risk, so our base case is that the BoC will continue to threaten to hike rates to persuade households into deleveraging. However, policy is more likely to remain on hold until well into 2013.”