Economists take another jab at low rates

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Core inflation is nearing a seven-year high, but should that prompt the government to consider raising the overnight rate? Economists seem to think so.  

Don’t expect the Bank of Canada to pull back on its monetary easing, despite inflation approaching a seven-year high.

“Canadian inflation remains on an upswing … we remain of the bias that this will only intensify into early next year,” ScotiaBank writes in its most recent Scotia Flash report. The economists write that the BoC is ignoring these inflation readings and will continue with its economic easing plan. That stimulus usually drives up consumer spending and borrowing with a knock-on and potentially inflationary effect to follow.

Ostensibly with that in mind, Scotia economists are expressing concerns about the central bank’s assessment that this near seven-year inflation increase is fleeting.

“The BoC’s bias throughout 2014-15 has been to look through this as transitory in nature,” Scotia writes. “We view it as longer lived and more sustained.”

Still, inflation currently sits at 1.3%, well off the Bank of Canada’s target of 2%. So brokers can rest assured the central bank will keep its benchmark rate – which has helped bolster business this year -- at 0.5%.

Many pundits argue the Bank of Canada will hold off on hiking its overnight rate until sometime in 2016.

At its last rate announcement, the Bank of Canada said it believes inflation will return to a sustained rate in 2017.

“The Bank now projects Canada’s real GDP will grow by just over 1 per cent in 2015 and about 2 1/2 per cent in 2016 and 2017,” the central bank writes. “With this revised growth profile, the output gap is significantly larger than was expected in April, and closes somewhat later. The Bank anticipates that the economy will return to full capacity and inflation to 2 per cent on a sustained basis in the first half of 2017.”

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