BANK OF CANADA TO RESUME CAUTIOUS APPROACH TO RATE CUTS NEXT YEAR: TD CHIEF ECONOMIST
TD Bank’s chief economist says the Bank of Canada is unlikely to make another 50-basis point (bps) cut to its overnight lending rate next year as the bank reached the top end of its neutral range with its latest jumbo cut on Wednesday.
“At this point, they have hit their neutral range, at least the upper end of what they had previously estimated, and they need to be careful because you can overshoot,” Beata Caranci told BNN Bloomberg in a Thursday interview.
“(Which) could provide too much stimulus into the housing sector in particular and the consumer sector, because Canadians are highly interest rate sensitive both on the way up and now on the way down, meaning there’s a big impulse to spend when rates come down.”
Caranci said the central bank will continue to cut rates next year, but revert back to lowering by 25 bps, which it did at three consecutive meetings this year starting in June. She added that the bank likely won’t cut at each meeting, predicting no more than four cuts in 2025.
If that prediction holds, the central bank’s overnight rate could by the end of next year hit the bottom end of the bank’s neutral rate range, which it estimates is between 2.25 per cent and the current 3.25 per cent.
Caranci said that with the central bank’s fight to tame inflation having given way to concerns about a weakening economy, the bank is now trying to reach the neutral rate, which neither stimulates nor restricts economic activity.
The rate itself is unobservable, shed noted, but said TD estimates that it is near the bottom end of the bank’s range.
“We think that realistically, Canadian productivity has been nonexistent not just for a matter of one year but many years, and so we’re probably looking at a lower neutral rate around two and a quarter,” Caranci said.
“But we’ll have to see because we don’t even know yet what (Donald) Trump’s going to do in terms of tariffs on Canada, which would make the Canadian economy more vulnerable.”
Caranci said that when it comes to the current strength of the Canadian economy, she doesn’t agree with the view held by some experts that Canada is in a recession as far as per-capita gross domestic product (GDP) figures are concerned. That metric has declined six quarters in a row.
“Effectively, when you think through recession-type dynamics, you’re looking at if people’s incomes are declining, and if the job market is declining, it’s not just a GDP metric and it’s certainly never been a GDP per capita metric,” she argued.
“So, when you look at not just job growth remaining there, and we had 50,000 jobs created last month which is terrific, you also see income growth at about four per cent in Canada. These are not indicators of recession.”
Story by: BNN Bloomberg
