November 1, 2024
Rosenberg noted that pre-COVID-19, the interest rate was 1.75 per cent and there was no “disinflationary output gap” of the economy producing less than it can, while GDP and inflation were lower, but unemployment was higher. “The path of future rate cuts may be open for debate,” he said. “But the destination is not.”

Canada’s interest rates could fall more than many on Bay Street think

Economy shooting off too many troubling flares for this pair of prognosticators

A couple of well-known economists are predicting the Bank of Canada will end up cutting interest rates lower than many have forecast as weakness in the economy continues to accumulate.

Wednesday’s jumbo-sized 50-basis-point cut left the central bank’s benchmark lending rate at 3.75 per cent, still well above the 2.25 per cent to 3.25 per cent range for its neutral rate, which is where the cost to borrow neither speeds up nor slows down the economy.

But with the economy shooting off troubling flares in different areas, economists at Rosenberg Research & Associates Inc. and Royal Bank of Canada are calling for interest rates to fall to two per cent or even lower by the middle of next year as policymakers respond to those emergency signals.

“A policy rate above the neutral rate is totally incongruent for an economy in a state of lingering excess supply,” David Rosenberg, founder of Rosenberg Research, said in a note on the Bank of Canada’s rate cut. “Such a condition augurs for a rate no higher than two per cent, and quite possibly lower.”

Claire Fan, an economist at Royal Bank of Canada, echoed Rosenberg’s assessment that this rate-cutting cycle should end at two per cent given the building signs of stress in the economy.

“In terms of the terminal level of interest rates, we think the BoC will cut to two per cent by July next year, stimulative and a touch below the lower bound of the (Bank of Canada’s) own estimates of (a) neutral rate at 2.25 per cent to 3.25 per cent,” she said in a note on Wednesday.

Interesting Read…

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