'Interest rates could increase by 2-3% over next two years'

'Interest rates could increase by 2-3% over next two years'

Investors should be braced for an interest rate increase of between 2-3% over the next two years, according to a leading economist.

Pierre Cléroux, vice president, research and chief economist, Business Development Bank of Canada (BDC), said he expected the Bank of Canada to return the benchmark to more “normal” levels over the next 24 months.

Speaking at an Economic Luncheon 2019, hosted by Goldman Communications in partnership with the Canada Israel Chamber of Commerce, Cléroux said it’s critical this is done – albeit slowly – to allow the BoC to prepare for the next slowdown.

He said: “The Bank of Canada is going to do it very slowly just to make sure that households are able to adjust to this new reality.

“Our debt ratio is really high in Canada so we can’t do it really quickly - the idea is not to slow down the economy, the idea is to keep the growth. Basically, Ontario, BC and Quebec are all running at full capacity so there is no need right now to simulate the economy with low interest rates.

“They want to increase the interest rate to a more neutral rate and also to prepare for the next slowdown. When you have a slowdown you need to have some room to decrease rates, so if the interest rate is 1.75% like it is today, it is very hard to simulate the economy by reducing it.”

Cléroux reminded people that rates remain very low and that before the last recession, the Bank’s overnight rate was 5% before being dropped lower to stimulate the economy.

Addressing the economic outlook in general, he picked out a number of things he was monitoring closely. The most important, he said, was the state of the US economy, with 75% of Canada’s exports going south of the border and 85% of Ontario’s export doing the same.

He said: “The US economy is underperforming extremely well and is going to perform well, we believe, next year but from 2020 it’s more of a question mark.

“What is stimulating the economy in the US right now is tax reform, which is going to be phased out in 2020, and interest rates are increasing, so this is going to have an impact on the economy as well. 2020 is going to be a very important year for the US and by consequence it’s going to be an important year for Canada.”



More market talk: