Economists at Bank of Nova Scotia are bringing forward their forecast for the U.S. Federal Reserve Board to start normalizing interest rates, but its economic forecasts remain unchanged.
Scotia economists now expect the Fed to start raising rates in the second quarter of 2015, rather than the fourth quarter, which was their previous call.
The change comes amid new guidance from Fed chairwoman Janet Yellen indicating that rate hikes could begin within six months of the end of the Fed’s bond purchase program, which Scotia expects by October of this year, “meaning that rate increases could commence as soon as at the March 18, 2015 FOMC meeting.”
Scotia notes that there are risks in both directions, as the bond purchase program could end either earlier, or later than expected. And, it says that “bringing forward the starting point does not lead us to materially alter our projected level for short-term interest rates by the end of our forecast horizon.”
Scotia’s forecast for Canadian overnight rates hasn’t changed. “The Bank of Canada (BoC) is forecast to lag behind the Federal Reserve by two quarters at the start of their respective hiking cycles, and will lag the Fed on hikes throughout the cycle,” it says, noting that Canada’s central bank is already at a higher starting point on the policy rate, did not pursue quantitative easing, and the Canadian economy faces a tougher growth path. “Overall, we think Canadian interest rates will generally rise at a slower pace than in the United States,” it says.
Additionally, it says that the outlook for U.S., Canadian and global growth is not affected by the shift in policy settings. “We continue to expect the U.S. recovery to gradually gain momentum as pent-up demand is unleashed and fiscal restraint reduced. U.S. GDP growth is still pegged at 2.8% this year and 3.0% in 2015, in line with the Fed’s revised projections.”
“Canada will benefit from strengthening U.S. demand, with exporters getting an added boost from a weaker Canadian dollar. However, a softer profile for consumer and housing activity suggests Canadian output growth will lag U.S. trends, advancing 2.2% this year and 2.5% in 2015,” it says.
Elsewhere, Scotia has revised its growth forecast for the UK in 2015 slightly higher to 2.0% from 1.8%, and it has revised Italy’s growth numbers slightly higher. However, it has slashed its forecasts for Russia due to growing tensions with Ukraine and the likelihood of deeper economic sanctions. It now expects growth of 1.5% in 2014, down from 2.3%, and it has trimmed the 2015 growth call from 2.6% to 2.3%.