BUSINESS

Interest Rates: Bank Of Canada Will Stand Still Until 2016, Scotiabank Predicts

10/03/2013 03:54 EDT | Updated 01/23/2014 06:58 EST
CP
OTTAWA - The Bank of Canada won't pronounce on interests rates until later this month, but Scotiabank economists are jumping the gun in speculating Canadians won't have anything to worry about until 2016.

The economists say remarks by the central bank's senior deputy governor earlier this week suggest the bank's view is now that the economy's spare capacity may remain into sometime in 2016.

Even then, the economists argue the economy is unlikely to overshoot into excess demand, so there would be no hurry for the bank to raise rates.

Most analysts see the bank keeping its policy rate at one per cent — where it's been for three years — until sometime late in 2014 or early 2015, but few believe it will stay at such stimulative level for another two or three years.

On Tuesday, the central bank's Tiff Macklem said the economy needs to grow by more than 2.5 per cent annually to start closing the output gap, a key measure of whether the economy is performing up to potential.

But in the year leading up to this past June, Macklem noted that growth averaged a mere 1.4 per cent and predicted the second half of 2013 will see the cruising speed rise only slightly to the 2.0-2.5 range.

That's a significant downgrade from the second-half acceleration the bank had expected.

Further worries that 2014 will also prove disappointing suggest the central bank may need to revise its longer-term outlook for the economy as well, Scotiabank says.

Low interest rates are generally seen as likely to boost economic performance because firms and individuals can more cheaply finance their investments and spending.

But the Bank of Canada has also warned that keeping rates low for too long a period is problematic for savers and pension funds, and encourages households to spend beyond their means.

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