What’s next for Tiff Macklem and the Bank of Canada?
THE CANADIAN PRESS/Adrian Wyld
The Bank of Canada is widely expected to accelerate its rate cutting efforts next week to shore up the economy. Economists and markets are anticipating a half-percentage cut in the central bank’s policy rate at a decision on Wednesday, when policymakers led by Governor Tiff Macklem convene in Ottawa. Since June, they have cut interest rates three times, but only by a quarter point each time.
A half-point cut, which is rare, will bring the central bank’s policy rate to 3.75 per cent, from a peak of 5 per cent earlier this year. The move will lower the prime lending rate at commercial banks to just under 6 per cent. (Prime rates are currently 2.2 percentage points above the central bank’s policy rate).
What then?
Ideally, the central bank makes a few more cuts over the next year, perhaps by another percentage point in total, to return borrowing costs to more normal levels. In this scenario, the so-called soft landing, interest rates don’t need to fall any further than that because the economy has returned to a healthier state. (We’re currently in the midst of the slowest growth stretch in decades, outside of recessions).
This Goldilocks rate, what central banks call “neutral,” is tough to estimate with any accuracy, but the Bank of Canada believes it’s probably somewhere between 2.25 percent and 3.25 percent. After next week’s rate decision, we probably won’t be that far from the top end of the range.
The second, less optimal, scenario is one where the economy continues to struggle and the Bank of Canada is actually forced to backstop economic activity with cheap money again, like it did for much of the 2010s. Policy goes from restrictive to stimulative in a year or so.
While we’ll take policy-induced growth over no growth, this second scenario is less sustainable and creates other types of problems and vulnerabilities. Canadians are currently paying the costs of that cheap money from last decade in the form of expensive housing and large debt burdens. Monetary policy is no replacement for a growth agenda.
What’s the more likely scenario—the first or the second? Unfortunately, risks appear to be tilted toward the second scenario.
Economists predict the Bank of Canada will need to continue cutting rates beyond the midway of its “neutral range” to shore up the economy. According to the median forecast of the nation’s five largest banks, policymakers are expected to cut the benchmark rate to as low as 2.25 per cent—very close to a stimulative setting. Borrowers will cheer a return to cheaper money, but if the economy needs stimulus, it means we’re not in a great place.
