The Bank of Canada once again opted to maintain its target
for the overnight rate at 1 per cent. In its accompanying statement, the Bank
highlighted that inflation continues to move below the Bank's 2 per cent target
due to significant excess supply in the Canadian economy. It also noted that the
risks to inflation appear to be to the downside, meaning it sees the risk of
continued below target inflation as a more likely outcome than a rise in
inflation. This, along with the Bank's expectation of a "soft
landing" in the Canadian housing market, suggest that monetary policy will
remain highly accommodative.
The Bank of Canada is currently projecting that excess
supply in the Canadian economy will be eliminated sometime in mid-2015. Keeping
in mind that the Bank has spent the past several years pushing that date back,
if the Canadian economy does accelerate as most expect in 2014, a gradual rise
in short-term interest rates will follow. Importantly, an uptick in Canadian
economic growth next year will most likely be the result of stronger external demand,
particularly from a resurgent United States.
However, stronger growth in the US economy will also put upward pressure
on long-term yields, lessening some of the urgency for monetary tightening. For
that reason, we expect that eventual Bank of Canada tightening will occur very
slowly, beginning with a 25 to 50 basis point increase in the overnight rate in
2015.
Copyright BCREA -reprinted with permission
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