Bank of Canada interest rate forecast report December 2020

Key findings

• 68% of economists predict the rate will hold until 2023 or 2024
• Majority of economists (89%) think the government needs to offer more stimulus and economic supports in the coming 6 months
• Nearly a quarter (22%) of experts are in favour of Universal Basic Income in 2021
• No (0%) economists view housing affordability as positive and see moderate average growth (3%) in residential housing values
• Property experts raise serious concerns about the future of commercial real estate and large urban centres

Expert forecasts ahead of the December 9 decision

• Brett House
• Carl Gomez
• Moshe Lander
• Lars Osberg
• Tony Stillo
• Murshed Chowdhury
• Derek Holt
• Helmut Pastrick
• Philip Cross
• Eldar Sehic

Brett House

Deputy chief economist, Scotiabank

Hold

“Very low nominal and real interest rates should held households and businesses bridge their way through the pandemic and begin investing for the post-pandemic economy. But as we saw in the wake of the 2008 financial crisis, abundant liquidity and persistently low interest rates also tend to inflate asset prices and widen wealth gaps.”

Carl Gomez

Chief economist and head of market analytics for CoStar Group

Hold

“Much of the pent-up real estate demand that was released by lower interest rates and the end of the first lockdowns has been spent. With limited population growth due to immigration restrictions, the ending of some mortgage deferral programs, ongoing employment weakness and lack of consumer confidence, some parts of the housing market, especially high-density condos are likely to be very weak. On the other hand, single detached homes in suburban and exurban areas may continue to see strong demand from urban buyers with equity.”

Moshe Lander

Professor of economics, Concordia University

Hold

“Wealth accumulation becomes very difficult when assets are delivering a negative return in real terms. While many complain about the great inequalities in income and wealth distributions, near negative interest rates make it that much harder for those with few assets and/or low incomes to raise their status.”

Lars Osberg

Professor of economics, Dalhousie University

Hold

“[Near negative rates will] enable a housing bubble.”

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

“As the Bank of Canada projects that the Canadian economy will operate below its potential into 2023 and inflation projection below 2%, it’s important to keep the borrowing cost low for Canadians. Also, forward guidance regarding low interest will be helpful for reducing any uncertainty in the coming months and years.”

Derek Holt

Vice president & head of capital markets economics, Scotiabank

Hold

“[Near negative rates] support interest-sensitive sectors like housing and big-ticket consumer spending.”

Helmut Pastrick

Cheif economist, Central 1 Credit Union

Hold

“During the pandemic CERB and related programs provided income support, and rightly so. A UBI would need to be very well designed and targeted and some current support programs would need to be changed or eliminated. A complex issue, for sure.”

Philip Cross

Senior fellow Macdonald-Laurier Institute

Hold

“In the short-run [near negative interest rates] are clearly stimulating housing and government spending. But at the same time they are increasingly distorting our financial system and acting as a long-term drag on potential growth.”

Eldar Sehic

Principal economist The Conference Board of Canada

Hold

“Given that the Canadian economy remains fragile and that interest rates will remain low for a long time, the low interest rates will guide the economy’s recovery by stimulating borrowing and spending, while discouraging saving.”

• Roelof van Dijk
• Sherry Cooper
• Angelo Melino
• Atif Kubursi
• Sri Thanabalasingam
• Craig Alexander
• Douglas Porter
• Benjamin Tal

Roelof van Dijk

Senior director, National Research & Analytics, Colliers International

Hold

“As such, once the COVID vaccines are fully delivered, we expect many workers to come back to the office, at the very least a few days a week, and therefore there will need to be space dedicated for these people. We have already seen tenant intentions changing, with the indication that they will not see a significant change in the space needs once COVID-19 is behind us. The larger change will likely be less open offices, as the pendulum swings back from ever denser offices to less density and more attention to wellness. This will be able to be achieved not by taking more space, but by allowing employees to work from home a little more than prior to COVID-19.”

Sherry Cooper

Chief economist, Dominion Lending Centres

Hold

“Low interest rates will continue to encourage interest-sensitive spending such as home, auto and consumer durables sales. They will also boost the stock market as yields on fixed income products remain exceedingly low.”

Angelo Melino

Professor, University of Toronto

Hold

“The Canadian economy’s recovery from the pandemic crisis will be a drawn-out and patchy process that requires exceptional monetary support from ultra-low interest rates and unprecedented use of quantitative easing for some time to come.”

Atif Kubursi

President, Econometric Research Ltd

Hold

“Now that we are seeing the public health pandemic last gasps, the economic challenges will dominate the agenda of the policy makers. Weaknesses in the economy will take centre stage. The challenge is to kick-start the economy and recover lost jobs. The government will do its best through monetary policy and fiscal policy to accommodate invigorating investment and households spending.”

Sri Thanabalasingam

Senior economist, TD Bank Group

Hold

“Near-zero rates will help support the economic recovery over the coming years. It will keep borrowing and debt-servicing costs low, allowing for more spending and investing activity. It could also support continued growth in the housing market.”

Craig Alexander

Chief economist & executive advisor, Deloitte

Hold

“[Near negative rates are] supportive of economic growth by raising spending and investment, but run the risk of creating additional household leverage.”

Douglas Porter

Chief economist, BMO Financial Group

Hold

“[Near negative rates are] supportive of economic growth by raising spending and investment, but run the risk of creating additional household leverage.”

Benjamin Tal

Managing director, CIBC

Hold

“[Near negative rates] will help to stimulate demand during the recovery.”

The December 9 decision

The Bank of Canada provided forward guidance in October that it has no plans to increase the overnight rate from near zero until inflation gets back to 2%, which is unlikely to happen until 2023 or later, according to the majority of economists in the Finder panel.

Of the 19 economists who participated in the latest Finder BoC panel, 10 believe the rate will hold until at least 2023 with another 3 believing they will hold the rate into 2024. This means 69% of our economists believe the rate will hold into 2023 or 2024. Only 6 (31%) believe it will change earlier in 2022.

Just 6 months ago, only 40% of our panel believed near negative rates would stay until 2022 or 2023. However, now nearly three-quarters (69%) of our panel see the rate holding for a minimum of two years.

Economic outlook

This pandemic recession will affect the economy for years to come, as will the near negative interest rates that accompany it. Since the Bank of Canada and most economists believe near zero rates are here to stay for years, it is a huge shift in mindset in such a short time.

We asked our panel of experts how near negative interest rates will affect the Canadian economy in the coming years.

Atif Kubursi, president of Econometric Research, paints the picture for why interest rates remain low and the ensuing benefits.

“Now that we are seeing the public health pandemic last gasps, the economic challenges will dominate the agenda of the policymakers… Keeping the interest rates low to promote private investment, reduce the burden of the public debt and incentivize households to spend their savings. Reducing or eliminating interest payment on bank reserves should kick in once opportunities to make loans to businesses and households become feasible.”

Philip Cross, senior fellow at Macdonald-Laurier Institute, points out near negative rates, “in the short-run are clearly stimulating housing and government spending. But at the same time they are increasingly distorting our financial system and acting as a long-term drag on potential growth”.

Moshe Lander, senior lecturer at Concordia University, highlights the main issue with near negative rates being the widening wealth disparity and associated challenges for many Canadians.

“Wealth accumulation becomes very difficult when assets are delivering a negative return in real terms. While many complain about the great inequalities in income and wealth distributions, near negative interest rates make it that much harder for those with few assets and/or low incomes to raise their status,” says Lander.

Craig Alexander, Deloitte’s chief economist, believes “[near negative rates are] supportive to economic growth by raising spending and investment, but run the risk of creating additional household leverage.” Lars Osberg, economics professor at Dalhousie University, also believes near negative interest rates will “enable a housing bubble”.

Douglas Porter, chief economist at BMO, has a positive outlook, feeling near negative rates “provide strong support to the housing market and prompt a fast rebound in consumer spending as we emerge from the pandemic.” Derek Holt, head of capital markets economics at Scotiabank, agrees low rates “support interest-sensitive sectors like housing and big-ticket consumer spending”.

Sherry Cooper, chief economist at Dominion Lending Centres, points out that near negative rates “will also boost the stock market as yields on fixed income products remain exceedingly low”.

Angelo Melino, University of Toronto professor, cautions: “Near negative rates will encourage aggregate demand and help the economy recover in the short run but will also lead to higher debt levels for households, firms and governments that will expose the economy to financial risks in the future.”

Stimulus

When asked if the government should continue to roll out more stimulus to support Canadians in the coming 6 months, the vast majority of economists (89%) believe additional stimulus is required while only 11% are unsure.

Most economists point out that much uncertainty remains as part of this second wave which means the government must bridge some crucial gaps for Canadian households and businesses.

Scotiabank’s deputy chief economist Brett House points out the government support for households or business is more like bridge financing to support Canadians until a widespread vaccine roll-out, than it is economic stimulus.

“Further federal spending to support households and businesses through extended and new lockdowns isn’t stimulus – it’s bridge financing until vaccines are widely available, and it is necessary to ensure a massive amount of productive capacity isn’t destroyed in the coming months, which would impair future growth. It’s also necessary to ensure economic activity isn’t further centralized in a small number of mammoth, and increasingly monopolistic firms.”

Helmut Pastrick, chief economist, Central 1 Credit Union, says: “The next six months will be very problematic and more support for some households and businesses will be required. Of course, the amount and extent of support will depend on the severity of the second wave.”

Murshed Chowdhury, associate professor at the University of New Brunswick, points out the crucial situation small business finds itself in: “The debt-equity ratio is becoming very high for small businesses. They can’t survive without further support.”

Tony Stillo, director of Canada economics, Oxford Economics, offers a reminder that the economic recovery and the public health recovery go hand in hand.

“There can be no sustainable economic recovery without a sustainable health recovery. Controlling the surging second wave of infections will necessitate stricter, broader restrictions and continued government support to minimize potential harm to households and businesses.”

Universal basic income (UBI)

Recently, Newfoundland and Labrador’s NDP party advocated for the introduction of a form of universal basic income (UBI). However, only just over a fifth (22%) of economists in our panel think that Canada should enact this at the federal level. Around two-fifths (39%) of economists were either against the move or unsure.

Philip Cross is against the move, saying that the introduction of a UBI now would be an undue financial burden on the government.

“Small experiments with UBI do not factor in their overall cost to the government. In view of the record deficit the federal government is running, this is not the time to introduce major new social programs. We can use this time to study the impact of income support programs introduced in 2020 on labour force participation.”

Chief economist and head of market analytics for CoStar Group, Carl Gomez, is also against the introduction of a UBI, citing negative incentives.

“Although compassionate in principle, universal basic income causes a number of negative externalities for the economy. In particular, it creates a disincentive to work and relatedly, the higher taxes needed to fund this would also create a disincentive to work in higher-income/paying jobs.”

On the other side of the argument is Brett House, who says that the guarantee of a steady income would take the stress off many vulnerable households and provide them with a better form of support than is currently in place.

“The federal government has already effectively run a UBI experiment with the CERB that shows that it could be done. A guaranteed annual or universal basic income would provide greater security and less volatility in household finances for our most vulnerable, create a base that would allow workers to retrain in the face of technological change and globalization, and be more efficient and less patronizing than our patchwork of income and tax supports.”

Impact of Biden presidency

With the US presidential election finally (kinda) in the rearview mirror, we asked our panelists to tell us how they thought a Biden presidency will impact the Canadian economy, and 63% said that the future looks positive. The remaining 37% were neutral, with no economist being negative.

Sherry Cooper thinks that the end of the Trump era will be a positive for Canada, as the Biden win brings with it the end of uncertainty.

“With the end of uncertainty and Trump anti-trade policies, Biden’s win supports the US economy and stock market and hence the Canadian economy and stock market. We have already seen the impact on stocks.”

Craig Alexander agrees, saying that Biden’s approach to policy both foreign and domestic will have positive outcomes.

“Biden will be supportive to fiscal stimulus, will use scientific advice to fight the pandemic, is less likely to use tariffs to achieve goals, will work better with allies and will deliver less volatile policy.”

Lander is in the neutral camp, saying that while there is great hope that Biden will undo much of the ills of the previous administration, the reality of the situation means that Biden will spend his time focusing on issues that won’t have an immediate impact on Canada’s economy.

“While Biden is unlikely to pick fights with Canada and engage in the name-calling that characterized the outgoing president, a Biden presidency will be a one-term deal and will focus on other issues (for example, COVID, China, the environment, restoring diplomatic normalcy, etc.). Canada is not high on that list, so the hope that a Biden presidency will cure Canada of all its recent ills, especially as it relates to energy infrastructure, is overblown and certain to disappoint.”

Bankruptcies and closures

Like the last report, the industry most at risk is the hospitality industry, with 100% of panellists agreeing this industry will very likely experience increased bankruptcies and closures in the coming 6 months. This is followed by domestic tourism (74% very likely, 26% likely) and the health and wellness industry (74% very likely, 26% likely).

Brett House points out that support remains incomplete and ineffective in some cases, with lockdown measures appearing “arbitrarily biased against small enterprises”.

Murshed Chowdhury highlights the unique challenges faced to business during wave two of the pandemic.

“Most of these industries were struggling to overcome the loss from wave one. Now, many of them are facing lockdown due to wave two. Despite the support from federal and provincial governments, it would be difficult for many businesses to recover from the recurring losses,” Chowdhury said.

Derek Holt summarizes the current challenge with rolling lockdowns: “Serial shutdowns pose a very different challenge than shutting once. Businesses are not in business to rely on government support as their debts mount.”

Housing values to experience modest increases in the spring market

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

The 11 panellists forecasted an average increase of 3% during the height of the spring market. Toronto and Winnipeg tied for the highest anticipated increases (5%), with Vancouver and Hamilton rounding out the top 3 with a 4% increase. Overall there isn’t much variance between markets, with each city included in the survey expected to see property prices increase by an average of 3%.

Most of our experts agree that the record-low interest rates have been keeping buyers interested and prices high but this could change into 2021. Carl Gomez explains the current residential real estate landscape.

“Much of the pent-up demand that was released by lower interest rates and the end of the first lockdowns has been spent. With limited population growth due to immigration restrictions, the ending of some mortgage deferral programs, ongoing employment weakness and lack of consumer confidence, some parts of the housing market, especially high-density condos, are likely to be very weak. On the other hand, single detached homes in suburban and exurban areas may continue to see strong demand from urban buyers with equity.”

Benjamin Tal, managing director of CIBC, agrees with Gomez that condos may see some softening in the near future, mainly in high rise units, but expects to see a very strong spring market.

Moshe Lander believes there is continued interest in the housing market because of the shift toward working from home, leading people to reevaluate their housing options.

“Real estate continues to defy predictions of its impending collapse. As the economy starts to change irrevocably toward a post-pandemic world, more people are reaching the conclusion that home and work will become entwined more intimately in the future and that living space needs to be reviewed to accommodate such a future,” says Lander.

Commercial real estate

Similar to the last report, the economists are concerned about the continued challenges faced by commercial real estate. When we asked if the industry will face increasing vacancies or rent deferrals in the coming 6 months, 100% of our experts said yes.

The pandemic is undoubtedly having some negative effects on commercial real estate. The normalization of virtual and flexible work arrangements for thousands of Canadians is the biggest catalyst cited by the experts when discussing these challenges.

Carl Gomez provides a macro analysis on many challenges that Canadian commercial real estate face during the pandemic.

The real-life experiment of working from home has proved successful for more and more businesses. Productivity has not suffered and many workers appreciate having the option of working from home even if some would still like to be in the office. As such, many tenants are looking at their space needs, particularly in expensive locations in the core of major cities and contemplating whether they really need to pay these high rents to keep (and attract talent) when they can work from home. This is likely to result in some reduction in aggregate office space demand in the coming years, even once the virus has been eliminated.

Roelof Van Dijk, senior director, national research and analytics for Colliers International, explains the how and why of rent deferrals.

“As companies continue to suffer, there will no doubt continue to be additional sublet space coming to the market, specifically in the downtown office markets, in addition to some tenants giving back space upon renewal (or bankruptcy … particularly for retail space). As for rents, there will be continued negotiations with landlords for deferrals and reductions on renewal. Some of this is due to business needing a break, whereas there are others that are looking to take advantage of the situation.”

Brett House takes a contrary approach believing some of these trends won’t persist, insisting “Obituaries for the office, city centres and commercial real estate are overdone: greater flexibility and more remote work will be a feature of many teams in the coming years, but we still need to be together to work effectively and build new businesses.”

Six-month economic outlook

The panel’s outlook for household debt has worsened since our last report, with 74% taking a negative view, followed by housing affordability and underemployment (47% each).

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

These measures all continue to lean more and more negative as 2020 comes to a close, with the pandemic worsening and the recession still in full swing.

Following the same trend from our previous 2 reports, the panel continues to have the most positive outlook on employment with only a slight decrease, to 53% holding this outlook. Just one-third (32%) of the panel have a positive outlook on underemployment over the next 6 months, down from 63% in June.

The panel’s outlook for household debt has worsened since last report with 74% taking a negative view, followed by housing affordability and underemployment (47% each).