Falling interest rates concept

The Bank of Canada will likely follow the U.S. Federal Reserve Board in shifting its approach to monetary policy, allowing for lower rates for longer, says TD Economics.

In a new report, TD said that the Fed’s new policy framework, which includes a more flexible approach to inflation and a new focus on employment shortfalls, means the central bank will likely take longer to raise interest rates.

“The Federal Reserve’s change to Flexible Average Inflation Targeting is an effort to fight the stubbornly low inflation that has persisted for the last decade,” the report said. “It is trying to reset inflation expectations.”

“A longer road ahead in meeting inflation and employment objectives equates to a more patient central bank and a policy rate that will be anchored lower for (even) longer,” it said.

A similar shift is expected from the Bank of Canada, which is also reviewing its policy approach.

“Though it is debating a range of different options, the most likely outcome is a framework that will allow higher inflation to offset past misses,” the report said.

The results of the Bank of Canada’s review are due in 2021 when the government and the central bank will renew their agreement on an inflation-control target.

Canada’s central bank “may choose not to follow the same direct objective of FAIT [flexible average inflation targeting], but the end result of lower for longer will be the likely outcome,” TD said.