Bank of Canada To Lag US Fed Rate Hike Schedule

The Bank of Canada could lag the U.S. Federal Reserve in starting to raise rates, but it may also lag behind in terms of the pace of hikes during the upcoming cycle, says a Scotiabank outlook.

Scotiabank economists Derek Holt and Dov Zigler anticipate an end to Fed bond purchases by October 2014, with a higher fed funds rate coming by Q2 2015.

They expect the BoC to follow two quarters later — “and with the fatter tail risk lying in favour of a longer lag relative to the risk of hiking at the same time or ahead of the Fed.”

The economists noted the Fed began raising interest rates ahead of the BoC in both 1999 and 2004, and exceeded its Canadian peer in terms of the magnitude of the full cycle’s tightening campaign.

There have been two exceptions in recent times when the BoC hiked ahead of the Fed, but Scotiabank believes neither is a compelling case for the risk of a repeat.

The most noteworthy occasion was when the BoC starting raising rates in April 2002 and continued to a cumulative 125 basis points before hitting a ceiling 12 months later.

“This occurred during a period in which the Fed was cutting rates, and the experiment did not end well for the BoC as the overnight rate blew out to a very wide 225bps over the US,” the economists said.

The second occasion was in June 2010, when the BoC raised rates just before its conditional commitment to remain at 0.25% expired.

via Financial Post

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