Macquarie he Bank of Canada is set to be on the sidelines a year longer than expected, and that will cause spreads between Canadian and U.S. bonds to widen further.
The rating agency now forecasts that the central bank will not hike interest rates until the second quarter of 2019, compared with its previous call for a hike in Q2 2018.
Divergent monetary policy between the U.S and Canada means that bond spreads between the two countries will also widen.
The call comes as a Macquarie analyst notes that a record amount of Canada’s economy is now dependent on housing. That compares with the U.S., where the housing market is gradually rebounding, and remains a "tailwind" for the country’s economy.
"Any potential BoC rate hike cycle will be constrained because negative feedback effects on the economic outlook will be more substantial than in previous cycles," said David Doyle.
Because housing has tied the central bank's hands, Doyle also predicts that rates in Canada will rise slower and stay lower for longer than previously expected.
