Watching interest rates? Take a break for a couple of years

Panel of economists believes the BoC is unlikely to announce any changes until 2022 or 2023

Watching interest rates? Take a break for a couple of years
Steve Randall

Don’t expect the new Bank of Canada governor to be announcing any variations in interest rates in the next few months – or the next few years!

A panel of leading Canadian economists convened by shows that these extraordinary times we are in includes the likely trajectory for interest rates; almost two thirds of the panel believe they will be on hold for as long as the next two years.

The largest single share of the vote (31%) suggests that rates will be on hold at 0.25% until the second half of 2022 with 19% expecting a change in the first half of that year, and the same share predicting the second half of 2021. Thirteen percent believe it could be the first half of 2023 before the BoC shifts gear.

None of the panel believes there will be a change on July 15, 2020.

Moshe Lander, professor at Concordia University, is one of the panelists who believe the rate will hold. He says there are significant challenges ahead, even as Canada moves to full reopening of the economy.

“The economy is opening up based on positive news regarding coronavirus infections, recoveries, etc., but the economy has done very little to prepare itself for if/when a second wave returns in the fall,” he warned. “Those safeguards should be put in place now while there is time rather than in haste and haphazardly when it strikes, to limit the economic damage.”

Economic outlook
The panel agrees that there are tough times ahead.

While participants were a little more optimistic than the recent IMF outlook, which called for an 8.4% fall in Canada’s GDP in 2020, down 2.2 percentage points from its April forecast.

More than half (62.5%) of the panellists forecast Canada’s GDP will fall by 6% - 8% in 2020.

“It will depend on the pandemic, but we've seen a decline of about 18% through April,” said Angelo Melino, professor at the University of Toronto. “The flash estimate is for May to see an increase of 3%. I expect June and July GDP to be even stronger as the lockdown restrictions are relaxed, followed by more modest recovery after that.”

Derek Holt, vice president and head of capital markets at Scotiabank, added that Canada faces a bigger challenge than the US due to several key economic differences.

“The Canadian economy is expected to contract at a sharper rate this year than the US, its dominant trading partner, as Canada also grapples with more mature housing and consumer cycles, the sharper effect of the drop in oil prices and a generally more cautious approach to reopening,” Holt said.

Stock market bubble?
Asked whether it is likely that the stock market is overvalued or in a bubble, more than half of the panel said it was likely or very likely.

“There appears to be a significant disconnect between underlying potential earnings and current valuations. In short, the market appears to be overly optimistic about future growth,” said Carl Gomez, chief economist and real estate strategist at C.G. Economic Partners.