The expected timing of a Bank of Canada (BoC) rate cut has been pushed back several times over the past few months, disappointing those hoping to buy a home or with a mortgage renewal on the horizon.
If and when cuts do happen, those same people may be underwhelmed. Experts say that interest rates falling does not mean Canada will get close to the near-zero levels of the COVID-19 pandemic.
“No, we’re not going back to that, in the absence of some economic catastrophe on a scale of COVID,” Moshe Lander, a senior lecturer in economics at Concordia University, told Yahoo Finance Canada. “It’s not going to happen.”
Diana Avigdor, head of trading at Barometer Capital Management, noted in an interview that late-2023 forecasts for around six cuts in 2024 would still only have resulted in a benchmark rate of 3.5 per cent, a rate still higher than seen in more than a decade before this high interest rate era.
“These cuts are getting further and further away and getting smaller and smaller, creating a situation of higher for longer, because the economic data that are coming in are coming in a little hotter than expected,” Avigdor said. “This is the normal, not what we had for 20 years.”
Cuts expected, but quantity uncertain
Canadian economists are not aligned on how rate cuts will play out this year, but many now expect fewer cuts by the end of 2024.
In January, CIBC expected 150 bps of cuts this year, bringing the benchmark rate to 3.5 per cent.
Following the BoC’s April 10 decision to hold its benchmark rate steady at five per cent, CIBC economist Andrew Grantham said the bank still expects a cut in June and a total of four 25bp cuts by year’s end, but he noted that forecast would hold only with “core inflationary pressures sustaining their current lower rates or easing further.”
BMO’s December 2023 outlook foresaw the benchmark rate down to four per cent by the end of 2024. That expectation has also been tempered.
On Friday, BMO chief economist Douglas Porter offered a more conservative forecast. “Assuming the first cut is in June, we expect a follow-up move in July, as the Bank traditionally moves in couplets, and then one more cut late in the year.”
In February, Desjardins Group said it expected rates to be halved by the end of 2025. The financial group says its models of recent federal caps on immigration suggest “more rate cuts than expected by the consensus of economists is even more likely to materialize.”
Normal, natural, neutral
With four cuts by year’s end, the benchmark rate would end up at four per cent. That’s still a far cry from the 0.25 per cent of the COVID era, but right around where many economists think it should be in a normal economy.
Four per cent is “the natural level” for interest rates in Canada, says Lander, as it neatly accounts for a desired inflation rate of around two per cent and the country’s long-term real GDP growth, also around two per cent.
“[The rates] go above that when the economy overheats, they can go a little bit below that when the economy is underperforming,” he said. “The number right now from the Bank of Canada is five per cent. So without doing a lot of detailed economic analysis, I’d say that there’s about one percentage point that interest rates can go down. And then we’re back to business as usual, at least as it has been over the last 30 years.”
The BoC has its own version of that number, the nominal neutral interest rate, which is actually a range. Last Wednesday, it raised the neutral rate from two to three per cent up to between 2.25 per cent and 3.25 per cent.
“The neutral rate is where our policy rate would be in the long run, when inflation is at target, the output gap is closed, and there are no shocks,” BoC governor Tiff Macklem said last Wednesday.
Raising the neutral rate is a sign that the BoC doesn’t expect its cuts to be quite as deep as it once did, Canadian Centre for Policy Alternatives economist Sheila Block told The Canadian Press.
One job for the BoC
The BoC’s focus isn’t to ensure people have cheap mortgages or high-returning GICs, Lander says. Its monetary policy mandate is singular, to keep inflation stable.
“So whatever the interest rate is that’s necessary to achieve its mandated goal is essentially what it’s going to do,” Lander said. “Whether that interest rate then ends up at five per cent, where it is now, or half a per cent, the way it was during COVID. It’s agnostic about what that number needs to be. It’s the inflation rate.”
Although many economists remain, at present, reasonably confident about a June or July cut, Lander notes that intangibles and unexpected developments are always possible, but impossible to predict.
“Circumstances happen,” he said. “A cold winter, or at least a cold snap in the winter, everybody reaches for the thermostat. Instability in the Middle East leads to oil prices jumping, which spills over into cost inflation. Those types of things, the Bank of Canada can’t forecast as being something they expect to happen.
“When it happens, all it can do is say, ‘Right, now that it’s happened, how do we think this plays out? And so the target gets moved.”
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf. Download the Yahoo Finance app, available for Apple and Android.
