Bank of Canada interest rate forecast report January 2021

Key findings

• 19% of economists believe current economic conditions warrant another cut.
• Around one-third (31%) of economists predict that the rate will hold for three years.
• Almost half the panellists (47%) don’t believe Canada can return to pre-pandemic GDP by the end of the year.
• Just 12% of economists view housing affordability positively and see moderate growth (2%) in residential housing values.
• The majority of panellists (87%) believe “immunity passports” will have a positive impact.
• 75% of experts forecast a return to “the office” won’t happen until at least Q4 2021.

Expert forecasts ahead of the January 20 decision

• Sebastien Lavoie
• Moshe Lander
• Lars Osberg
• Tony Stillo
• Murshed Chowdhury
• Derek Holt
• Philip Cross

Sebastien Lavoie

Chief economist, Laurentian Bank

Hold

“Things to turn for the worse if future COVID-19 variants were delaying herd immunity for a long period. There is not much monetary policy can do to mitigate the near term impact related to the worsening second wave.”

Moshe Lander

Professor of economics, Concordia University

Hold

“The Bank is running out of conventional monetary policy tools and is now resorting to unconventional ones to keep the economy afloat. As the federal government incurs record-breaking deficits and as the pandemic is far from over, I think the time is coming for the Bank to test the absolute limits of its conventional tools as more of the responsibility for maintaining the economy from imploding will fall to it.”

Lars Osberg

Professor of economics, Dalhousie University

Hold

“A major recession in the US could affect Canada badly.”

Tony Stillo

Director of economics for Canada, Oxford Economics

Hold

“A worsening health situation and stricter measures to contain surging cases of the virus are expected to result in a contraction in Q1 GDP. Risks in the near term are firmly skewed to the downside, before effective distribution of vaccines allows for the recovery to resume by mid year.”

Murshed Chowdhury

Associate professor, University of New Brunswick

Hold

“A nationwide… prolonged lockdown and the subsequent harmful impact on the economy could lead the BoC to reassess the effective lower bound. The effectiveness of having another cut but still positive policy rate is unlikely to help the economy to rebound or keep afloat given the current scenarios…”

Derek Holt

Vice president and head of capital markets economics, Scotiabank

Hold

“[The Bank of Canada may reassess the effective lower bound if there is a] more sustained adverse shock and diminished expectations for inflation.”

Philip Cross

Senior fellow, Macdonald-Laurier Institute

Hold

“The distribution of vaccines eventually, along with unprecedented monetary stimulus, will produce a faster recovery in the second half of 2021.”

• Sherry Cooper
• Angelo Melino
• Atif Kubursi
• Sri Thanabalasingam
• Vik Singh
• Benjamin Tal
• Benjamin Reitzes

Sherry Cooper

Chief economist, Dominion Lending Centres

Hold

“I think the demand [for housing] will remain strong, but the supply of ground-based housing will be very limited.”

Angelo Melino

Professor, University of Toronto

Hold

“The Bank should reduce its purchases of government debt to avoid holding such a large fraction as to disrupt the market. It may cut its policy rate at the same time that it announces a cut in its weekly purchases of Government debt as a way of maintaining a ‘neutral stance’.”

Atif Kubursi

President, Econometric Research Ltd

Hold

“The stop and go measures are exacting a heavy toll on the eonomy but at this time the negative effects are still in a few services sectors – accommodations and restaurants. If unemployment keeps rising and spreading, there may be reasons to rethink the 0.25% interest rate, but at this time, it is not necessary. The medium term that follows the widespread innoculation should temper this need to reduce the interest rate below the current 0.25%.”

Sri Thanabalasingam

Senior economist, TD Bank Group

Hold

“The Bank may already be reassessing the effective lower bound, but in order for it to reduce the overnight rate further, virus and vaccine developments have to take a turn for the worse.”

Vik Singh

Assistant professor, Ryerson University

Hold

“With low interest rates and the job cuts having not impacted ‘white-collar’ jobs, the housing market will continue to rise, especially in the Toronto and Vancouver areas.”

Benjamin Tal

Managing director, CIBC

Hold

“We expect some softening in the [housing market] in the coming months as overall economic activity will slow.”

Benjamin Reitzes

Canadian rates and macro strategist, BMO

Hold

“[The Bank of Canada may reassess the effective lower bound if there is a] Stronger Canadian dollar, later output gap closure.”

The January 20 decision

Since the beginning of the pandemic, when the rate underwent an emergency cut in March 2020, the Bank of Canada has maintained that 0.25% would remain the effective lower bound.

However, in a speech given by Deputy BoC Governor Paul Beaudry in December, he noted that if things “take a more persistent turn for the worse”, the Bank’s options would include “reassessing the effective lower bound, which would allow for the possibility of a lower – but still positive ­– policy rate.”

Finder.com asked our panel of esteemed economists if Canada’s economic conditions have deteriorated enough to warrant another policy rate cut. Turns out that despite Beaudry’s December comments, 75%, or 12 of our 16 panellists, don’t believe current conditions warrant another rate cut.

Atif Kubursi, president of Econometric Research, explains why the unpredictability of the pandemic prevents a linear economic recovery.

“The stop and go measures are exacting a heavy toll on the economy but at this time the negative effects are still in a few services sectors – accommodations and restaurants. If unemployment keeps rising and spreading, there may be reasons to rethink the 0.25% interest rate, but at this time it is not necessary. The medium term that follows the widespread inoculation should temper this need to reduce the interest rate below the current 0.25%.”

Sebastien Lavoie, chief economist for Laurentian Bank, believes the economic situation will take a turn for the worse if future COVID-19 variants delay herd immunity for a longer period, saying that “there is not much monetary policy can do to mitigate the near term impact related to the worsening second wave.”

Murshed Chowdhury, professor of economics at the University of New Brunswick explains that it is important to focus on the “effectiveness” of any further cuts, rather than the situation, like changes in US monetary policy, that could lead to them being employed.

A [near] nationwide prolonged lockdown and the subsequent harmful impacts on the economy could lead the BoC to reassess the effective lower bound. The effectiveness of having another cut but still positive policy rate is unlikely to help the economy to rebound or keep afloat, given the current scenarios. Also, further changes in the interest rate by the Fed will lead the BoC to reassess the situation.

Further to the “effectiveness” point, Sherry Cooper, chief economist for Dominion Lending Centre, doesn’t believe such a small cut would make any real difference to the economy and thinks it is very unlikely to happen.

Sri Thanabalasingam, senior economist at TD Bank, believes it’s possible. “The Bank may already be assessing the effective lower bound, but in order for it to reduce the overnight rate further, virus and vaccine developments have to take a turn for the worse.”

While they are in the minority, three of our economists (19%) believe conditions have actually worsened enough to warrant a rate cut.

Moshe Lander, economics professor at Concordia University, shares a warning about what may happen if the Bank continues with the status quo.

“The Bank is running out of conventional monetary policy tools and is now resorting to unconventional ones to keep the economy afloat. As the federal government incurs record-breaking deficits and as the pandemic is far from over, I think the time is coming for the Bank to test the absolute limits of its conventional tools as more of the responsibility for maintaining the economy from imploding will fall to it.”

Angelo Melino, economics professor at University of Toronto, provides some practical advice.

“The Bank should reduce its purchases of government debt to avoid holding such a large fraction as to disrupt the market. It may cut its policy rate at the same time that it announces a cut in its weekly purchases of government debt as a way of maintaining a ‘neutral stance’.”

Economic outlook

We also asked our economists the likelihood that the Bank of Canada will test this “effective lower bound” by asking if the next rate move would be up or down, regardless of when it happens. Again, just 2 out of 16, or 12.5%, of our experts believed the rate would dip lower before rising again. The remaining 14 panellists, or 87.5%, think the next rate move will be up.

While the question of IF the rate would dip further was mostly met with a resounding no, the question of WHEN the rate would rise again elicited a wider variety of responses.

Around two-thirds of economists (69%) believe the next rate move will be within the next two years, while just under one third (31%) believe the rate will hold for three years, until early 2024. Of those believing the rate will move in the coming two years, while only one panellist (6%) thinks that the rate will move in the first half of 2022, a quarter (25%) believe the rate will rise in the second half of that year.

Economic recovery (GDP)

Almost half the panellists don’t believe Canada can return to pre-pandemic GDP by end of the year.

The Canadian economy may have some tough sledding ahead of it, with almost half (47%) of our panel believing that Canada’s GDP won’t get back to pre-COVID-19 levels before the year is out. Kubursi believes it will be a slow build, adding “I think it is optimistic to believe the economy would recover so soon to pre-pandemic levels.”

Thanabalasingam thinks that rising cases and the rollout of the vaccine will all play a role in the recovery but does not believe that things will recover in 2021.

“This next phase of the recovery will be challenging with much depending on virus and vaccine developments. The current quarter will be especially difficult given rising caseloads and new restrictions. However, as a larger share of the population receives the vaccine, the economy stands to see stronger growth beginning in the second quarter.”

However, the panel wasn’t all pessimism, with 40% thinking that a recovery in 2021 is possible. Lavoie says there is a path to recovery this year but it will require a few key items to happen.

“A series of ‘big ifs’ needs to happen to see the pre-pandemic level of GDP before the end of 2021, although the mix of activities will be different: an acceleration in the vaccination rollout, no hiccup relative to vaccination reluctance, no major problems with future variants and effective lockdowns. The list is unambiguously long.”

Professor Melino thinks that the recovery will be driving mainly by the vaccine. “I expect strong growth in the second half of the year thanks to the new vaccines.”

Immunity passports

There has been much debate recently about the effectiveness of immunity passports – and not just for travel – but for nearly all activities that have been massively restricted, or totally unavailable to us, for the duration of the pandemic.

When we asked our panel of experts if immunity passports would have a more positive or negative impact on Canadian society, the response was overwhelmingly positive, with 13 of 15 experts (87%) feeling they would be beneficial to restoring the economy.

Moshe Lander frames the issue of immunity passports around the benefits of transparency.

“Transparency is always a good thing. If showing documents verifying that you have been immunised regains access to entertainment, travel and life in general, then so be it. That is a small price to pay for resuming normalcy.”

Derek Holt, head of capital markets at Scotiabank, agrees the immunity passports “would lend confidence in returning to such activities.”

Philip Cross, senior fellow at Macdonald-Laurier Institute, echoes the importance of confidence being the key issue for Canadians to feel safe to go about normal activities.

“We need to restore confidence in normal social and economic activity. Presenting a passport is no more intrusive than requiring masks [or other similar measures].”

Angelo Melino warns that immunity passports will be hard to enforce but they could serve to accelerate economic recovery.

Lars Osberg, professor of Economics at Dalhousie University, was in the minority and doubts the effectiveness of immunity passports, cautioning that “transmission rates are unknown, even for those who have been vaccinated”.

So even though immunity passports appear to be a step in the right direction according to our experts, we must exercise caution in relying on them totally as the virus evolves and while uncertainty remains.

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 to increase in value to least.

The 11 panellists forecasted an average increase of 2% in six months time, just one point lower than what was forecasted in the December BoC.

Toronto, Hamilton and Ottawa are in the lead for the highest anticipated increases (4%), with Vancouver and Montreal forecast to see a 3% increase. Overall, there isn’t much variance between markets, but larger cities like Toronto, Vancouver and Montreal are the ones likely to see the biggest price increases.

Vik Singh, assistant professor at Ryerson University, believes that individuals and households with higher incomes are driving housing prices higher in key markets, even during the pandemic.

“With low interest rates and the job cuts having not impacted ‘white-collar’ jobs, the housing market will continue to rise, especially in the Toronto and Vancouver area.”

Lavoie explains the ongoing shift in housing demand from city centres to suburban or rural areas and from small to larger.

Teleworking favours demand for housing in smaller cities. Surveys indicate the shift in preferences for larger homes, larger rooms and more green space. This shift appears permanent based on recent surveys. Softness in housing conditions is limited to rentals and small unit condos located in expensive, downtown core areas.

Most of our experts agree that while record-low interest rates are bolstering the real estate market, there is a difference when it comes to supply and demand. Big cities like Toronto and Vancouver are seeing oversupply in the condo market.

Cooper thinks “the demand will remain strong, but the supply of ground-based housing will be very limited.”

Cross points out with the pandemic still ongoing in the first half of the year, demand will be “lagging for city cores without a large civil service presence” back at the office.

Vaccination and returning to the office

With the promise of mass vaccinations returning some normalcy to our lives, we asked our panel whether they believed the vaccination schedule for Canadians would result in most workers returning to the office.

Unfortunately, none of our panel think we’ll be returning to the office anytime soon, with the earliest predicting a return in the third quarter of 2021 (25%). Half of our panel (50%) think that we should be back into the office in the fourth quarter of 2021, with a further 25% thinking that we’ll return in early 2022.

CIBC deputy chief economist Benjamin Tal is the camp of a return in quarter three, saying “we expect some softening in the coming months as overall economic activity will slow.”

At the other end of the spectrum is Lander who thinks that various factors will slow down the push for people to rush back towards an office environment.

“I do not believe that there is a rush for people to return to the office. Some businesses are finally getting used to working from home and will now consider this an increasingly viable option, especially if it allows them to shed the expensive rents and operational costs associated with commercial property. Given the slow rollout of the vaccine and the cautious approach of health officials in declaring a resumption of ‘normal’ activities, we can easily sit out another year before a callback to the office.”

Six-month economic outlook

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

While last quarter, most panellists were most negative about household debt, their views have softened, with just 37% taking a negative view, while 44% are neutral. This could be because of the widely publicized data showing many Canadians have been able to build up their savings during the pandemic while others have faced job loss and economic hardship.

Following the same trend from our previous two reports, the panel continues to have the most positive outlook on employment, with only a slight decrease to 50% holding this outlook. Also, nearly half (44%) of the panel have a positive outlook on underemployment, up from about one-third in the last report.

On the other end of the spectrum, economists are most negative on housing affordability, with the majority of them (69%) with a negative outlook. This is in line with the economists’ forecasts showing that real estate prices will either remain flat or rise slightly year-over-year.

Economists were mostly neutral on wage growth (56%) and cost of living (50%).

Image: Getty