Bank of Canada interest rate forecast report

Economists predict BoC interest rate to hold at 0.25% on June 3

Updated

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Key findings

  • 100% of economists predict rate hold on June 3
  • Around 87% of economists forecast rate holding at .25% for more than a year
  • 20% of economists believe the recession could become a depression
  • Economists predict increased housing affordability in major markets

Expert forecasts ahead of the June 3 decision

Brian DePratto panelist
Brian DePratto
Senior economist, TD Economics

Hold

“We have seen dramatic policy responses, both fiscal and monetary, and the early phases of economic re-opening are underway. In many ways, the current episode bears more resemblance to a natural disaster than to a ‘typical’ recession.”

Carl Gomez panelist
Carl Gomez
Professional Economist and Real Estate Strategist

Hold

“The recession is mainly the result of a policy-induced shutdown of the economy. It is not necessarily the result of structural problems in the economy, which are usually the catalysts for an economic depression. That said, this downturn is likely to expose some existing structural problems in Canada’s economy, like high debt levels, that could forestall a recovery.”


Moshe Lander
Professor, Concordia University

Hold

“The Bank is worried about pushing below its effective lower bound. I think it should be unconventional in these unconventional times and try a 10 bps decrease and see what happens. It can move incrementally until it really does reach the lower bound.”

Lars Osberg panelist
Lars Osberg
Professor of Economics, Dalhousie University

Hold

“Anxiety about possible inflation will limit monetary policy and worries about the deficit will limit fiscal policy, so together they imply insufficient macro stimulus.”

Alicia Macdonald
Associate director of Economic Forecasting, Conference Board of Canada

Hold

“With the overnight rate already at 0.25 per cent and the Bank of Canada’s recent guidance that it considers that the effective lower bound, a change in interest rates is unlikely.”

Hubert Marleau
Market Economist, Palos Management

Hold

“Low enough to stimulate loan demand. No sense making the Can$ stronger. Keep banks strong.”

Tony Stillo
Director of Canada Economics, Oxford Economics

Hold

“Canada is in the midst of an historic economic contraction as a result of the global pandemic and lockdown measures to contain it. We expect the Bank of Canada to continue its unprecedented monetary stimulus to help buffer the impact on people and businesses, and bolster the emerging economic recovery. We expect incoming Governor Tiff Macklem will maintain this extraordinary policy stance until the economic recovery is well underway.”

Murshed Chowdhury
Associate Professor, University of New Brunswick

Hold

“The current rate is at ‘effective lower bound’. Lowering the overnight rate further means the Bank is likely to step into the negative interest rate territory. For now, further lowering the rate is unlikely to stimulate the economy as the reopening of the economy is very gradual. The Bank may adopt some unconventional monetary policies along with the continuous expansion of purchases of bonds and other debt from government and businesses before lowering the target overnight rate any further.”

Brett House panelist
Brett House
Deputy chief economist, Scotiabank

Hold

“The efforts to contain the COVID-19 pandemic have opened up so much slack in the Canadian economy that we do not foresee an increase in the policy rate until 2022. The Bank of Canada has made it clear that it is not inclined to implement negative rates, but will instead focus on additional asset purchases to ensure smooth functioning of credit markets and accessible yields.”

Sebastien Lavoie panelist
Sebastien Lavoie
Chief economist, Laurentian Bank Securities

Hold

“The outlook for the recovery is clouded by low consumer confidence, anxiety about the virus itself and a likely delay to the housing sector. All these factors lean in favour of a below-target CPI inflation over the medium-term.”

Craig Alexander
Chief Economist, Deloitte

Hold

“The economy is in a deep recession, but taking rates negative will not be stimulative.”


Sherry Cooper
Chief Economist, Dominion Lending Centres

Hold

“Hopefully, the virus will not lead to a second and worse wave. If it does, we could see a prolonged depression. Hard to be precise about the distinction.”

Angelo Melino panelist
Angelo Melino
Professor, University of Toronto

Hold

“This recession will be deep but relatively short. The recession was driven by policy mandates to slow down the spread of the pandemic. I believe a relaxation of these mandates along with the development of treatments and or vaccines will allow the economy to recover most of the lost ground by next year.”

Hubert Marleau panelist
Atif Kubursi
President, Econometric Research

Hold

“The rate is low enough to stimulate loan demand. There is no sense making the Canadian dollar stronger, rather we should keep banks strong.”

James Knightley
Chief International Economist, ING

Hold

“There is broad based economic decline with little inflation threat yet the BoC has repeatedly stated that interest rates are already at their effective lower bound. Hence we expect no policy change.”

The June 3 decision

The Bank of Canada has maintained that .25% is the effective lower bound, with incoming Governor Tiff Macklem implying negative rates could bring increased volatility to an already volatile situation. Due to the bank’s consistent position, Finder’s panel of 15 economists all predicted the rate will hold on June 3.

Almost all of them (86.67%) agree a hold is both what the bank will do and what it should do, with two exceptions from the academic world. Moshe Lander, professor of economics at Concordia University, and Angelo Melino, professor of economics at the University of Toronto, think the Bank should cut the rate.

Lander suggests an experimental approach employing smaller than typical cuts, without reaching zero, to see if this has any stimulative effect on the economy.

“The Bank is worried about pushing below its effective lower bound. I think it should be unconventional in these unconventional times and try a 10 bps decrease and see what happens. It can move incrementally until it really does reach the lower bound.”

Melino believes the bank should lower the rate by either 25 or 10 basis points.

The majority of the panellists question the value of decreasing the rates at this point. Craig Alexander, chief economist at Deloitte, acknowledges that “the economy is in a deep recession, but taking rates negative will not be stimulative.”

Senior economist at TD Bank Group, Brian DePratto, also believes that economic stimulus will now come from asset purchases over decreases to the rate.

“Governor Poloz has stated that he views the current 0.25% overnight rate as the ‘effective lower bound’, meaning any further easing will need to take the form of asset purchases.”

Next rate move

Canada is now firmly in an economic recession, the severity of which remains unclear due to the unique circumstances that tie it to an ongoing global public health crisis. This unprecedented situation has most economists believing the overnight rate will hold steady at the effective lower bound for the foreseeable future.

Tony Stillo, director of Canada Economics at Oxford Economics, summarizes the current landscape and the bank’s strategy.

“Canada is in the midst of an historic economic contraction as a result of the global pandemic and lockdown measures to contain it. We expect the Bank of Canada to continue its unprecedented monetary stimulus to help buffer the impact on people and businesses, and bolster the emerging economic recovery. We expect incoming Governor Tiff Macklem will maintain this extraordinary policy stance until the economic recovery is well underway.

Nearly half (46.67%) of panellists believe the rate will hold for more than a year until the second half of 2021, with a further 26.67% believing it will hold into the first half of 2022 and 13.33% going so far as calling for it to hold until the second half of 2022. Only 13.33% believe there will be any movement within the next 12 months.

Brett House, deputy chief economist at Scotiabank, explains why he believes the policy rate won’t increase for an extended period of time.

“The efforts to contain the COVID-19 pandemic have opened up so much slack in the Canadian economy that we do not foresee an increase in the policy rate until 2022. The Bank of Canada has made it clear that it is not inclined to implement negative rates, but will instead focus on additional asset purchases to ensure smooth functioning of credit markets and accessible yields.”

Murshed Chowdhury, associate professor at the University of New Brunswick, believes lowering interest rates won’t have the stimulative effect it would typically have given this unique recession.

The current rate is at ‘effective lower bound’. Lowering the overnight rate further means the Bank is likely to step into the negative interest rate territory. For now, further lowering the rate is unlikely to stimulate the economy as reopening of the economy is very gradual. The Bank may adopt some unconventional monetary policies along with the continuous expansion of purchases of bonds and other debt from government and businesses before lowering the target overnight rate any further.”

Recession severity

While there is no longer any question that Canada is firmly in an unprecedented recession, and likely a serious one, the question remains, will we enter a deep and prolonged economic depression in the coming years?

20% of our panellists believe an economic depression is possible due to the unpredictable nature of the global health crisis and the undetermined length of the economic shutdowns. Of those forecasting a depression, 6.67% believe it is ‘likely’ and 13.33% ‘very likely’.

Atif Kubursi, emeritus professor of economics at McMaster University, believes it is very likely Canada’s recession will become a depression, mainly due to the far-reaching impacts and ongoing uncertainty of the pandemic.

“COVID-19 is likely to have far deeper consequences the longer it lasts and the more people are infected. There is no evidence yet that the crisis will end soon. The real problem lies in the drastic structural changes the virus has already made to globalization, nature of work, real estate footprint of businesses, and particularly to large crowd based activities.”

Lars Osberg, McCulloch professor of economics at Dalhousie University, also views the risk of depression as very likely. Rather than the pandemic’s public health ramifications, Osberg is more concerned about the anxiety about possible inflation, which he believes will limit monetary policy, coupled with worries that the deficit will limit fiscal policy, creating a combination that implies insufficient macro stimulus.

Moshe Lander believes it is purely a matter of semantics. He makes it clear that while a recession is a “well-defined” technical term, a depression is often characterized as a “really bad recession” which he believes we are already experiencing.

Despite the risks of a prolonged downturn, the majority of panellists don’t believe this recession will evolve into a depression in the coming years, with 80% of them thinking it is unlikely.

James Knightley, chief international economist with ING, believes that the “massive stimulus efforts” employed by the bank should avert a deeper recession since “once the reopening gets underway we should see employment rise and policy makers [have shown they are prepared] to offer more stimulus if required to ensure recovery happens.”

Sébastien Lavoie, chief economist at Laurentian Bank, believes “ongoing reopening plans suggest a controllable second COVID-19 wave which could keep away the severe option of going back in quasi-complete shutdown mode like we observed in late March.”

Angelo Melino is even more optimistic the recession will be short-lived since it was brought about by external forces.

“This recession will be deep but relatively short. The recession was driven by policy mandates to slow down the spread of the pandemic. I believe a relaxation of these mandates along with the development of treatments and/or vaccines will allow the economy to recover most of the lost ground by next year.”

Green New Deal?

The current recession comes at a time when many experts were expressing concerns about the long-term viability of the oil industry, particularly in Canada where production is becoming increasingly cost-prohibitive. These economic concerns have also been affected by the need to swiftly and drastically reduce emissions to have a meaningful impact on climate change.

We asked our panelists if this crisis could prove to be an opportunity for Canada to invest more heavily in clean energy and more than two thirds of economists (71.43%) agreed now is the time.

Sherry Cooper, chief economist for Dominion Lending Centres, believes Canada needs to pivot to clean energy because climate change is a huge problem. James Knightley also believes the long-term future is in clean energy and it makes sense for Canada to be involved.

Others, like independent economist Carl Gomez, believe a new greener economy will go so far as to herald the demise of the oil industry in its traditional model, with government investments in this industry over clean energy seen as a denial of our current reality.

A straightforward bailout of Canada’s crucial energy sector could amount to no more than corporate welfare for an “old economy” industry. Better to use the opportunity to create incentives for Canada’s energy sector to invest in clean energy technologies – a growing sector of the future,” said Gomez.

Lander sees oil as a threat to properly dealing with climate change and states that the opportunity for change is now and to not act on this opportunity is to miss a crucial opportunity to invest meaningfully in the future.

“Change is easiest when there is nothing to lose. With oil prices at record lows (in real terms) and with provincial budgets that rely on oil and gas royalties destroyed, it’s now or never to begin a transition to alternative energy. If the oil price recovers, the political conviction and the industry willingness to change goes away.”

Kubursi and Osberg see Canada’s oil industry in particular as possessing “stranded assets”.

“In the past, the oil sands looked like rational investments…but not at current or likely prices, time to face reality,” said Osberg.

“Oil production and consumption are increasingly becoming a threat to a clean environment and to dealing with climate change. Oil is likely to become a stranded asset. The question is not whether or not it will become a stranded asset; but when is that going to happen. There is no telling how fast this will take place but it will sooner or later as appreciation of the climate crisis becomes widespread,” Kubursi said.

Some who believe in clean energy investment advocate a more balanced approach. Alicia Macdonald, associate director of the Conference Board of Canada believes Canada should support both traditional oil and clean energy innovation.

“A low carbon future will require a significant increase in electricity generation capacity and investments now would ensure we can meet that future demand. That being said, the oil industry is a very important contributor to Canada’s economy and also needs to be supported during this crisis,” said Macdonald

Still others, like Brett House and Angelo Melino, are skeptical about now being the time for the government to invest more heavily in clean energy, advocating for a prudent or “wait and see” approach.

“We are still in the midst of stabilizing the finances of existing businesses and households. We should focus on alleviating existing pain before adding additional issues to our public-policy agenda” said House.

Melino was firm that now is not the time for Canadians to invest in any projects that don’t pass a clear “cost-benefit test”.

Border closures

The closure of international borders has decimated the travel industry and while some domestic travel may be possible soon, international borders are likely to be one of the lockdown measures that requires more careful consideration before being lifted. However, the majority of panellists believe we’ll be welcoming international visitors this calendar year, with just 14% or two panellists (Lavoie and Lander) saying they’ll be closed until 2021.

Lander said that although it’s bad for the economy, keeping the borders closed could help delay a second wave of infections and could look good politically.

“There is still a very significant risk of a second wave and so controlling people’s movement, especially without rapid testing, is critical to delaying the arrival of a second wave for as long as possible,” he said.

“As bad as it is for the economy, keeping the borders closed is a signal to the public that the government is doing its best. Unfortunately, keeping the border closed is not the real problem, but it looks good politically.”

Half the panel (50%) believes international travellers will be able to visit within two to four months and 21.43% think the borders will be open within one to two months.

Four panellists said how quickly Canada opens up its borders will depend on the US.

Murshed Chowdhury and Atif Kubursi believe the border will open up sooner rather than later given US-Canadian relations.

“Canada would have more interest in maintaining the ‘closure’ as most of the premiers are in favour of it, however, it depends on how the US reacts on that,” Chowdhury said.

Atif Kubursi also noted that there will be pressure on Canada to open its border with the US which will be difficult to resist “given our heavy dependence on the US for imports and exports”.

Osberg, who thinks we’re in for another two to four months of international travel bans went as far as to say that the Trump administration will not want bad news in the election runup, so will insist on the border opening.

Brett House said the current closure until June 21 is likely to be extended again into August owing to the public health situation in the US.

Six-month economic outlook

We asked our panellists about their six-month economic outlook for wage growth, employment, cost of living, household debt and housing affordability. Considering the ongoing impact and uncertainty of COVID-19 on the Canadian and global economy, the panel remained overwhelmingly negative about the economy’s outlook.

The panel mostly views cost of living as neutral, with 60% seeing it as neither positive or negative at the moment. At the beginning of the year only 9% of our panellists saw housing affordability as positive, now 46.67% of panelists view housing affordability positively, up around 5 percentage points from the last BoC survey in April.

The panel is most concerned about wage growth and household debt with 73.33% recording a negative sentiment wage growth and 73.33% for household debt, employment has a far more positive outlook (47% positive) but that is likely due to the gradual reopening of the economy, with millions of Canadians returning to the workforce in the months ahead.

Unemployment

Canada Emergency Response Benefit (CERB)

Nearly 10 million Canadians are collecting the Canada Emergency Response Benefit (CERB), and the program has received an unprecedented number of applicants. The program has provided Canadians with more than 40 billion dollars as of May 24, 2020.

With such a large investment and so many Canadians who have been temporarily laid off and unemployed relying on the CERB, experts have begun to wonder if the program will act as a disincentive for a return to work.

Our panel was asked to forecast when they think CERB should end and the responses were as varied as the type of Canadians who rely on the program. Of those who believed it should end sooner than planned, 7.14% believe it should end as early as June and 28.57% said July.

14.29% of respondents believe the program should run its course until the planned October end date and 50% said ‘other’ because so much is dependent on when people are able to return to regular employment.

While most respondents like Hubert Marleau, market economist with Palos Management, believe the CERB will eventually end as most people want real jobs more than they want to stay home for an indefinite amount of time.

Then there were those who said “other” for a defined timeline, like House, who explained the program should continue as long as public-health measures to control the COVID-19 pandemic make it impossible for people to work.

However, there are those like Lavoie who believe the CERB could act as a disincentive.

“Fiscal policies should favour efforts, activation and labour participation, rather than measures to stay home [doing] nothing. Efficient reallocation of the labour force should include incentives for young people to work in “high-contact” occupations since they are not dangerously exposed to severe health risks,” said Lavoie.

Kubursi cautions about the dangers of prolonged unemployment potentially rivalling the dangers of the virus for some.

“The social, political and economic costs of high levels of unemployment and poverty are too serious to tolerate. I would prefer to see people re-employed quickly and safely. The dangers of poverty and deprivation are just as high and serious as death from the infection.” said Kubursi.

Finally, Tony Stillo advocates a measured and balanced approach focused on providing workers with the support they require at any given moment.

“The CERB program should be modified to better enable the transition back to work so it should continue until economic recovery is firmly underway. The CERB’s $1,000 exemption for part-time work should be raised and set up to phase out gradually so that it counters disincentives to return to work and is better integrated with the government’s wage subsidy program, CEWS.” said Stillo.

Real estate outlook

Real estate is often a lagging indicator in recessions, but one of the first areas banks will be focused on is the mortgage arrears rate, which in Canada currently sits at about 0.2%. Recently the Bank warned in a worst-case scenario Canada could see the rate peak to 0.8%, which is about twice as high as it was at its peak during the last major recession in 2009.

When we asked our panellists what they thought the rate would peak at, three of the eight who answered said it would peak at 0.6%, a little lower than the bank’s worst-case scenario. However, when all estimates were averaged, they were completely in line with the bank’s predicted 0.8%.

If millions of Canadians are suddenly unable to pay for their mortgages due to long-term unemployment, household debt and the like, housing affordability could also be impacted in the longer term – especially in Canada’s major housing markets where affordability has been a growing concern for years.

Finder asked our panellists to assign a percentage value for any anticipated price decreases in 10 of Canada’s major markets and we averaged out the responses and ranked them from most anticipated decreases in value to least.

Unsurprisingly Vancouver and Toronto came in with the largest forecasted decreases at 12.65% and 12.55%, respectively. Montreal (9.55%), Calgary (9.40%), Hamilton (8.70%), and Edmonton (8.60%) are set to see price drops within the 8-10% range. Meanwhile cities like Ottawa (6.40%) Quebec City (5.40%), Halifax (4.90%) and Winnipeg (4.70%) are forecasted to experience more modest declines.

Image: Getty/Supplied

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