Economists at Bank of Nova Scotia have sharply altered their interest rate forecast, and are now expecting the Bank of Canada to keep rates unchanged through next year.

In a new report, Scotia economists reveal that they have significantly changed their rate forecast, and now expect the overnight rate to finish 2014 at an unchanged 1%. Previously, they only saw rates on hold until the first quarter of 2014, “so we are therefore now pushing that out by about a full year,” it says.

The report cites a number of reasons for what it calls “a pretty sizable forecast change”, including growing confidence in their expectation that the U.S. Federal Reserve Board will keep rates low until mid-2015. “It is difficult to expect Fed funds target rate hikes before early 2015 and so timing a BoC hike to occur around the same time seems reasonable,” it says.

It also notes that efforts to tighten mortgage lending seem to be working, which lessens the pressure for the BoC to reign in lending with higher rates. “As the lagged effects of rules-based and less transparent forms of regulatory tightening continue to unfold, there may well be additional downsides to credit growth,” it says.

Scotia also continues to expect that spare capacity in the economy will be used up more slowly than the BoC expects. “We see spare capacity persisting into 2015 at a minimum and therefore do not anticipate that the BoC’s malleable 1-3% inflation target band within a flexible framework will be significantly challenged,” it says. And, it says, another reason to believe that the output gap might persist is weakness in the energy sector.

Additionally, it suggests that inflation could easily keep undershooting the central bank’s inflation targets.

And finally, it says, that added uncertainty due to the pending leadership transition at the Bank of Canada could alter the bank’s stance. “We assume policy continuity, but 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,” it says.