Bank of Canada interest rate forecast report

Just 13% of panellists think the rate will move before 2022

Updated . What changed?

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Key findings

  • Just 13% of panellists think the rate will move before 2022.
  • A majority (60%) of panellists think the Bank should be doing more to guide Canada out of recession.
  • 86% of panellists think it’s likely or very likely that personal debt levels will worsen.
  • The hospitality industry is the sector most at risk for bankruptcies or closures in the coming six months.

Expert forecasts ahead of the October 2020 decision

Brett House panelist
Brett House
Deputy chief economist, Scotiabank

Hold

“We forecast that the Bank of Canada will keep the overnight rate target on hold until the second half of 2023 owing to the magnitude of the output gap, our forecasts for demand based on current and expected stimulus, our resulting forecast for inflation, and the Fed’s move to average inflation targeting.”
Carl Gomez panelist
Carl Gomez
Chief Economist, C.G. Consulting Group

Hold

“The BoC has made it abundantly clear that rates will need to remain low until the slack accumulated from the pandemic is ultimately absorbed.”


Moshe Lander
Professor of Economics, Concordia University

Hold

“The second wave is beginning in Canada and the potential damage could be even more severe than the first wave. Job losses, economic uncertainty and a decreased ability for the government to provide financial support to families could make for a brutal holiday season for retailers. Many just survived the first wave; many will not survive the second. The Bank of Canada needs to give as much room as possible for as long as possible to give households, businesses and governments room to manage their financial obligations without the threat of interest rate rises.”

Lars Osberg panelist
Lars Osberg
Professor of economics, Dalhousie University

Hold

“No plausible chance of widespread vaccination within 18 months.”

Tony Stillo
Director of economics for Canada, Oxford Economics

Hold

“We think fears that excessive monetary stimulus will stoke higher inflation are misplaced and expect inflation will remain subdued, with a greater risk of deflation due to weak aggregate demand and slack in the economy. The Bank of Canada’s forward guidance clearly states a plan to keep the policy interest rate at its current 0.25% level, the effective lower bound, “until economic slack is absorbed so that the 2% inflation target is sustainably achieved”. Accordingly, we expect the policy rate to remain at 0.25% until early 2024 before a gradual tightening begins.”

Murshed Chowdhury
Associate professor, University of New Brunswick

Hold

“Bank of Canada has repeatedly committed to keeping the policy interest rate very low for a long time. Unless we see a sharp recovery in the economy and a huge spike in inflation, the rate is likely to remain at the effective lower bound.”

Derek Holt
Vice president & head of capital markets economics, Scotiabank

Hold

“The persistence of spare capacity in the economy is likely to result in muted longer run inflationary pressure. Nearer term downside risks are rising.”
Helmut Pastrick panelist
Helmut Pastrick
Cheif economist, Central 1 Credit Union

Hold

“Too much excess capacity in the economy.”

Aman Chowdhary
Aman Chowdhary
Senior Market Analyst, CoStar Group

Hold

“With negative rates firmly off the table and the removal of the pledge of “further monetary stimulus as needed” the BOC will utilize unconventional methods to stimulate the economy for the next 24 months, maybe longer. The downturn in the US economy will continue impacting our sectors, particularly retail and hospitality and raising costs of delivering goods and services, further contributing to inflationary pressures. The BOC will continue quantitative easing by way of government bond purchases to support the recovery.”
Hubert Marleau panelist
Hubert Marleau
Market Economist, Palos Capital

Hold

“The economy needs sustained stimulus.”


Sherry Cooper
Chief economist, Dominion Lending Centres

Hold

“As we move into a second wave, it becomes more obvious that the economic recovery will be prolonged and bumpy.”

Angelo Melino panelist
Angelo Melino
Professor, University of Toronto

Hold

“The output gap won’t close until some time in 2021.”

Atif Kubursi panelist
Atif Kubursi
President, Econometric Research Ltd

Hold

“They are already too low. The 0.25% is just about what it would cost to process lending or borrowing.”

Sri Thanabalasingam
Senior economist, TD Bank Group

Hold

“Similar to the Federal Reserve, we expect the Bank of Canada to make adjustments to the monetary policy framework to allow inflation to run hot for a period of time to make up for past misses. This will entail keeping the overnight rate at the effective lower bound out until early-2024.”

Avery Shenfeld panelist
Avery Shenfeld
Managing director and chief economist, CIBC Capital Markets

Hold

“The Bank of Canada’s own forecast implies that they expect to be on hold through 2022. We’re hopeful that a post-vaccine ramp up in growth will have the economy healthy enough to tolerate a small rate hike in late 2023.”

Rate hold

In September, the Bank of Canada kept interest rates at a steady 0.25%, and it looks like this could be the status quo for a while, due to the economic slump triggered by the COVID-19 pandemic. So just how long will the rate stay this low? Panellists on Finder’s Bank of Canada report are divided.

Just 13% of panellists, including University of New Brunswick associate professor Murshed Chowdhury, think the rate will only stay at 0.25% until next year.

“Bank of Canada has repeatedly committed to keeping the policy interest rate very low for a long time. Unless we see a sharp recovery in the economy and a huge spike in inflation, the rate is likely to remain at the effective lower bound,” he said.

In the previous report, 25% of panellists predicted the rate to hold until 2022. This time, two in five panellists (40%) believe that the rate will bounce up from its effective lower bound in 2022, citing the second wave of COVID-19 and the lack of a vaccine as two of the reasons.

Concordia University professor of economics Moshe Lander, who predicts that the rate will hold until the second half of 2022, comments on the severity of this second wave and how much worse it is than the first.

“Job losses, economic uncertainty and a decreased ability for the government to provide financial support to families could make for a brutal holiday season for retailers.”

“Many just survived the first wave; many will not survive the second. The Bank of Canada needs to give as much room as possible for as long as possible to give households, businesses and governments room to manage their financial obligations without the threat of interest rate rises,” Lander said.

CoStar Group senior market analyst Aman Chowdhary believes that since negative rates are out of the question and further monetary stimulus is needed, the BoC will need to use other means to stimulate the economy.

“The downturn in the US economy will continue impacting our sectors, particularly retail and hospitality, and raising costs of delivering goods and services, further contributing to inflationary pressures. The BOC will continue quantitative easing by way of government bond purchases to support the recovery,” Chowdhary commented.

In the last report, half of our panel forecasted the rate to hold until 2023. However, only one in three (33%) now think the same. The 33% includes two experts from Scotiabank: vice president and head of capital markets economics Derek Holt, and deputy chief economist Brett House.

House put it this way:

“We forecast that the Bank of Canada will keep the overnight rate target on hold until the second half of 2023 owing to the magnitude of the output gap, our forecasts for demand based on current and expected stimulus, our resulting forecast for inflation, and the Fed’s move to average inflation targeting.”

Two panellists – Oxford Economics director of Canada economics Tony Stillo and TD Bank Group senior economist Sri Thanabalasingam – expect the Bank to hold the interest rate beyond 2023.

Thanabalasingam says they expect the rate to stay at the lower bound until early 2024.

“Similar to the Federal Reserve, we expect the Bank of Canada to make adjustments to the monetary policy framework to allow inflation to run hot for a period of time to make up for past misses. This will entail keeping the overnight rate at the effective lower bound out until early-2024,” Thanabalasingam said.

Should the Bank do more?

When asked if the Bank should do more to guide Canada out of the remainder of the recession, 60% of panellists say that the bank needs to take a more active role or change policy.

Lander says that the Bank cannot claim it has already tried everything simply because the rate is now at its effective lower bound.

“There is lots of room through unconventional means to keep the economy from flatlining. At this point, there is not much to lose by experimenting with those ideas. In the absence of more aggressive monetary policy, fiscal policy has to carry the day and the government will be unable to maintain budget deficits in the hundreds of billions of dollars indefinitely,” said Lander.

Tony Stillo thinks that now is the time for the Bank to coordinate its actions with fiscal and financial authorities.

“Whatever the outcome of the Bank of Canada’s policy review, we expect interest rates to remain low, perhaps for longer than in our current forecast, and the Bank of Canada to continue making extended use of unconventional policy tools like QE to support the economy and financial system,” he said.

On the other hand, one in three panellists (33%) do not think the Bank needs to do more beyond lowering the interest rate. This includes CIBC Capital Markets managing director Avery Shenfeld who believes the Bank is already doing what it can to cushion the pandemic’s economic impact.

“The Bank of Canada is fully deploying the tools that it has to cushion the impact of COVID-19 on the economy. It might make minor adjustments to its bond purchase program, but should not significantly ease up on stimulus until well after a vaccine has been deployed,” Shenfeld said.

Debt levels

The panel thinks personal debt levels will worsen in 2021. 86% said that it is likely or very likely that personal debt levels will worsen, while just 14% said the opposite. Professor Angelo Melino from the University of Toronto said it was very likely given “at some point next year, the government will have to start withdrawing fiscal support.”

On the other end of the spectrum, Aman Chowdhary said it was unlikely.

“Overall, Canadians have been saving a larger share of their incomes and consumer spending is projected to soften this year, which signals increased consumer caution. Household spending is projected to strengthen, driven by the growth of both the population and household disposable income. Coupled with travel being out of the question for most and winter approaching, personal debt levels should not worsen entering 2021,” Chowdhary said.

Bankruptcies and closures

The industry most at risk is the hospitality industry, with all panellists saying it is either very likely (71%) or likely (29%) that this industry will see increasing bankruptcies and closures in the coming six months. This is followed by domestic tourism (64% very likely, 36% likely) and the entertainment industry (64% very likely, 29% likely).

Moshe Lander said that industries that rely on close, person-to-person contact, or high volume, high turnover for consumers will suffer.

“If consumers cannot congregate in a small space in large numbers, then many of these industries do not have the financial buffer to withstand another shock, but also many of them do not have a viable business model for a post-pandemic economy,” Lander said.

Econometric Research Ltd president Atif Kubursi said: “There is no escape from this predicament as long as no vaccines are available, accessible and effective.”

Property price forecasts and CMHC

Despite some of the dire predictions set forth earlier this year, the Canadian property market might not fall as far as expected. In fact, half the panel say that the CMHC forecast that Canadian house prices will fall by 9-18% this recession is no longer relevant.

Dominion Lending Centres chief economist Sherry Cooper explained that the average home prices nationwide were up by 1.5% at the latest reading in August, cautioning that the CMHC is overly pessimistic.

Central 1 chief economist Helmut Pastrick agrees that prices are actually on the rise and says that record-low mortgage rates will continue to drive sales and prices higher.

That’s in line with the average price forecast across 10 cities over the next six months, with the seven panellists who answered the question forecasting an average increase of 3%. There isn’t much variance between markets, with each city included in the survey expected to see property prices increase by an average of 2-3%.

However, despite the forecasted price increase, around a third of the panel (33%), including Tony Stillo, agree with the CMHC forecast of a market drop of 9-18%. He concedes that the property market has been resilient, but he still expects a modest retreat in housing activity later this year and through mid-2021.

“This reflects historic loss of income, job insecurity, virus fear and uncertainty, stricter CMHC lending rules, an effective pause on immigration, an exodus out of high-density urban markets, low tourist and foreign student demand for Airbnbs, and end of mortgage deferrals by banks. These factors may force many homeowners – particularly highly leveraged households and investors – to quickly sell their homes.”

C.G. Consulting Group chief economist Carl Gomez noted that large fundamental imbalances in the various housing markets across the country still exist.

“After a wave of pent up demand and low interest rates caused a strong bounce back in summer activity, these fundamental factors are likely to start weighing on the market (without the offsetting support of even lower rates and increased government support, or, for that matter, stronger population growth),” Gomez said.

Economic outlook

We asked our panel about their six-month economic outlook for wage growth, employment, underemployment, cost of living, household debt and housing affordability.

Following the same trend from our previous two reports, the panel continues to have the most positive outlook on employment, with 60% holding this outlook. However, while last month both employment and underemployment tied for the most positive outlook, we’ve seen a dramatic drop in the percentage of panellists holding a positive outlook for underemployment this month. Just one third (33%) of the panel have a positive outlook on underemployment over the next six months, down from 63% last report.

There is also a marked shift in the outlook for housing affordability. In the last report, 68% of the panel had a negative outlook for this indicator, while only about 33% said the same this month.

The panel is the most negative on household debt (53%), followed by wage growth and employment (40% each).

Image: Getty

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