Rate forecast a double-edged sword

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Canadian economists have suggested the Bank of Canada will look to increase rates sooner rather than later, with the Bank of America expecting a rate cut.

"As the Fed hikes, the spillover effect of higher long-term rates in Canada will likely tighten financial conditions, reducing the need for any BoC policy tightening," Emanuella Enenajor, a Bank of America economist, and Ian Gordon, a foreign exchange strategist, said in a new report titled Handcuffed by the Fed. "Even as the Fed begins a gradual rate hike cycle this year, we think the BoC will remain accommodative, and will likely ease by another 25 basis points to 0.5 per cent if growth disappoints, as we expect."

 A number of Canadian economists, however, have a differing opinion.

According to the National Post, Silvana Dimino, a JP Morgan Chase & Co, economist, believes the Bank of Canada will hike its key interest rate in the middle of next year, despite previous forecasts that the Central Bank will wait until the end of 2016.

“He recognizes there’s going to be some weakness in the Canadian economy, but he’s saying it’s going to be front loaded,” Dimino told the Post. “If things go as they’re saying, and the output gap does close around the end of 2016, it seems reasonable they would start hiking before that.”

Poloz, of course, surprised the country with a 25 basis point rate cut in January.

The rate cut was part of the government’s “economic easing” and was expected to help kick-start the economy as it attempts to rebound from low inflation levels.

“We anticipate a partial rebound in growth in the second quarter, and a move to above-trend growth thereafter, for annual growth of 1.9 per cent this year,” Poloz in late April. “This projected growth profile gets us back on track to absorb our excess capacity around the end of 2016, at which time inflation will settle sustainably at 2 per cent.

“We see the risks around this projection as roughly balanced, but they will be reassessed continuously as new data become available.”
 
  • Darr Robbins on 2015-05-19 9:45:09 AM

    With labor participation rate, median household income, average hourly work week at historic lows and falling combined with debt levels at all time highs, any suggestion that the FED will tighten in a debt fueled economy is preposterous. The caveat is credit spreads blowing-out triggering a de-leveraging cycle.

  • Mortgage Guy Geoff on 2015-05-19 9:46:28 AM

    Aye aye aye...another day, another bunch of supposed "experts" with predictions. Whatever.

    All the noise, all the conflicting opinions about what's going to happen or not happen is way more damaging then the eventual reality itself. Not to mention the self-fulfilling prophecy nature of most comments. (What's the easiest way to hit a light pole when driving? Concentrate on doing everything you can to avoid hitting it.)

    Lets all individually look at whatever data makes sense to us, form our own opinions, and advise our clients accordingly. If we're not capable of such rational logical thinking then shame on us for even being in the business in the first place.

  • Darr Robbins on 2015-05-19 9:59:41 AM

    MGG, what you're saying makes sense but please follow-through. What data makes sense for you, what's your personal opinion, and what are you advising accordingly?

  • Mortgage Guy Geoff on 2015-05-19 10:43:42 AM

    @Darr...respectfully, that's exactly what I'm talking about. The last thing anyone needs is to have me and every other broker spitting out our theories/predictions - that ship is already overcrowded. My clients are well aware of my thoughts about the current and future market conditions and they are free to listen or ignore as they see fit.

    Thanks though...its flattering that you are inviting me to share. I just don't think it would help the situation at all.

  • Mortgage Guy Geoff on 2015-05-19 10:47:05 AM

    Oops...sorry @Darr...I see now that perhaps you thought my comments were directed at you. Not at all, and I regret any offense. In fact your comments seem well thought out. (From the timestamps it looks like we may have been writing our initial notes at the same time.)

  • Darr Robbins on 2015-05-19 1:29:32 PM

    MGG- No offence taken and thank you for thinking about it.

  • Jesse D on 2015-05-25 9:08:46 PM

    Economists all need to get a job.

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